Key facts
- The U.S. dollar index was flat at 100.9 on Wednesday.
- U.S. consumer inflation slowed to 3.5% year-on-year in June.
- The headline consumer price index fell 0.4% month-on-month in June.
- Softer inflation data reduced expectations for an imminent Federal Reserve rate hike.
- Traders are pricing in a 65% chance of a September Fed rate hike.
- Rising oil prices due to Middle East hostilities pose inflation risks.
The U.S. dollar held steady on Wednesday, following a decline in the previous session, as softer-than-expected inflation data reduced expectations for an imminent Federal Reserve interest rate hike. The U.S. dollar index, a measure against six major currencies, was flat at 100.9 after experiencing its largest pullback in nearly two weeks.
Consumer inflation in the U.S. slowed to 3.5% on a year-over-year basis in June, with the headline consumer price index falling 0.4% for the month, marking the first monthly decrease since April 2020, largely due to retreating energy prices. This data led to a drop in U.S. Treasury yields, dampening market expectations for a near-term rate increase by the Fed. Traders are now pricing in approximately a 65% probability of a rate hike in September.
Despite the cooling inflation, concerns remain that elevated oil prices, driven by ongoing hostilities in the Middle East, could reignite inflationary pressures. The U.S. military has conducted new strikes in the region, and a naval blockade of Iranian ports has been reimposed.
In currency markets, the dollar was trading at 162.24 against the yen. The euro and British pound both saw modest gains, trading at $1.1428 and $1.3406, respectively. The New Zealand dollar hovered near a one-month high at $0.5815, while the Australian dollar traded at $0.6985. Norway's crown weakened against the euro and dollar as core inflation eased more than anticipated in June.
Separately, China's economic growth slowed sharply to 4.3% in the second quarter, its lowest in over three years, prompting a brief strengthening of the yuan on expectations of further policy support.