The U.S. dollar lingered near a one-month low on Thursday, as a string of encouraging inflation reports dampened expectations that the Federal Reserve would move quickly to raise interest rates — though an escalating conflict in the Middle East is adding new uncertainty to the economic outlook.
The dollar slipped against the Japanese yen for the third straight trading day, falling 0.1% to 162.075 yen. The euro climbed 0.1% to $1.1472, reaching its strongest level in a month. The British pound held near a two-month high at $1.354, supported by market expectations that Britain’s incoming prime minister will choose a fiscally conservative finance minister.
Both the Australian and New Zealand dollars edged down roughly 0.1%, settling at $0.6995 and $0.5842 respectively.
The U.S. dollar index — which measures the currency against six others — was largely flat at 100.47, hovering near its lowest point since June 18. The index has dropped 0.8% over the prior two sessions and appears on pace for a weekly loss.
A key driver of the dollar’s retreat was a surprise drop in U.S. producer prices in June — the largest monthly decline in 14 months — adding to a growing body of evidence that inflation was already cooling before the latest flare-up in the Middle East.
That report, paired with softer-than-expected consumer inflation and a slowdown in hiring last month, has essentially taken a July rate hike off the table. The probability of a rate increase this month dropped to just 11%, down sharply from a 45% implied chance at the start of the week. Markets currently see roughly even odds of at least a quarter-point rate hike in September, based on Fed funds futures tracked by CME Group.
Bosco Wu, investment strategist at Bank of East Asia, offered this perspective: “The recent dollar weakness appears to be a correction from previous highs. Markets had aggressively priced in a July rate hike, which now looks somewhat overblown given that inflation is cooling fast.”
Wu cautioned, however, that the broader trend toward tighter monetary policy remains in place. A single month of cooling inflation is unlikely to confirm a lasting slowdown, and the Middle East conflict should help put a floor under the dollar’s value.
Heightened tensions between the U.S. and Iran have pushed oil prices toward one-month highs, keeping the inflation outlook uncertain. On Wednesday, the U.S. struck Iranian coastal defenses and missile installations following the re-imposition of a naval blockade on Iranian ports. Iran responded by threatening to cut off more regional energy exports, describing the situation as an “existential war” with America.
Oil markets extended their rally into a fourth consecutive session Thursday, with Brent crude futures trading near a one-month high at $85.28 per barrel.
