Dollar Drops As Soft Inflation Dims Fed Hike Bets

(RTTNews) - Better-than-expected inflation readings from the U.S aided and abetted the dollar's mild retreat during the week ended July 17.

Markets tempered expectations of a rate hike by the Federal Reserve amidst softer-than-expected levels of consumer price inflation and producer price inflation in the U.S. However, the fresh flare-up in the Middle East as well as the safe haven demand and crude oil price spike that followed, limited the dollar's decline.

During week ended July 17, the U.S. dollar inter alia declined against the euro, the British pound, the Australian dollar, the Canadian dollar, the Swiss franc as well as the Swedish krona. It however rallied against the Japanese yen.

As a result, the Dollar Index which measures the Dollar's strength against a basket of 6 currencies dropped close to a quarter percent on a weekly basis. Here is a quick recap of the dollar's trajectory during the week ended July 17 that also witnessed a dramatic escalation in the Middle East war.

Worries about a hawkish monetary policy action by the Federal Reserve that had boosted the greenback faded after the recent updates to consumer price inflation as well as producer price inflation from the U.S. According to the CME FedWatch tool that shows the expectations of interest rate traders, the likelihood of a quarter percent rate hike in the July FOMC dropped to 13 percent on July 17 from 34 percent a week earlier.

Data for June released on Tuesday by the U.S. Bureau of Labor Statistics showed annual headline inflation declining to 3.5 percent from 4.2 percent at the end of the previous month. Markets had expected it to fall to 3.8 percent only. The core component thereof, excluding the volatile food and fuel component which was expected to decline to 2.8 percent from 2.9 percent in May actually dropped to 2.6 percent.

Markets which had expected the monthly headline inflation to record -0.1 percent saw it slip to -0.4 percent, versus 0.5 percent at the end of previous month. The core component thereof which was expected to remain steady at 0.2 percent witnessed flat prices.

Data for June released on Wednesday morning by the U.S. Bureau of Labor Statistics showed producer price inflation at -0.3 percent versus a downwardly revised 0.6 percent in the previous month. Markets had expected prices to remain flat.

Markets also digested Federal Reserve Chair Kevin Warsh's recent congressional testimony where he placed on record that lowering inflation was his top priority.

During the past week, the Dollar Index traded between the weekly high of 101.33 recorded on Monday and the weekly low of 100.35, recorded on Wednesday. The index eventually closed the week's trading at 100.76, implying a decline of 0.19 percent from the level of 100.95 on July 10.

Boosted by the dollar's weakness as well as expectations of another rate hike by the ECB in September, the EUR/USD pair rallied 0.22 percent during the week ended July 17. From the weekly low of 1.1378 touched on Tuesday, the pair climbed to a high of 1.1483 on Wednesday. The pair eventually closed the week at 1.1439, versus 1.1414 a week earlier.

Amidst rising crude oil prices that reinforced expectations of a rate hike by the Bank of England before the end of the year, the British pound rallied 0.36 percent against the greenback during the week ended July 17. The GBP/USD pair which had closed at 1.3407 on July 10 closed trading for the week ended July 17 at 1.3455. The weekly trading range was wider, between a low of 1.3341 recorded on Tuesday and a high of 1.3560 recorded on Wednesday. Data released on Thursday showed GDP in the U.K. expanding as expected, by 0.1 percent month-on-month in May versus a 0.1 percent contraction in April.

The Australian Dollar surged 0.45 percent against the U.S. Dollar during the past week amidst the greenback's retreat attributed to the decline in inflation in the U.S. The AUD/USD pair closed the week ended July 17 at 0.6983 versus 0.6952 recorded a week earlier. During the week, the pair oscillated between a low of 0.6912 recorded on Tuesday and the high of 0.7022 on Wednesday.

The U.S. dollar however rallied against the Japanese yen during the week ended July 17 amidst the sharp spike in crude oil prices and a potential energy shock for Japan's imports. The USD/JPY pair closed the week at 162.39 versus 161.70 a week earlier, registering a surge of 0.43 percent. During the week, the pair oscillated between the low of 161.61 recorded on Monday and the high of 162.56, on Thursday.

Despite the intensified Middle East conflict, the dollar's safe haven rally remains subdued at the onset of the new week. Amidst ebbing rate hike expectations from the Federal Reserve, the six-currency Dollar Index has ranged between 100.65 and 100.82 on Monday. The index is currently trading at 100.78, edging up from Friday's closing level of 100.76.

The European Central Bank's next interest rate decision is due on Thursday. Amidst the anticipation, the EUR/USD pair is currently trading 0.06 percent lower at 1.1432 versus 1.1439 on Friday.

The GBP/USD pair is currently trading near 1.3467 versus 1.3455 on Friday, implying a gain of 0.09 percent. Several economic data releases including unemployment, inflation, retail sales and PMI readings are due from the U.K. during the course of the week.

The AUD/USD pair is currently trading 0.33 percent higher at 0.7006 versus 0.6983 on Friday. The USD/JPY pair is trading flat at the level of 162.39 recorded at the end of the previous week. Trade as well as inflation updates are due from Japan during the week.