DXY Falls to 1-Month Low

The dollar index climbed to 98.6 on Thursday, reaching its highest level in two weeks as investors focused on a two day summit between US President Donald Trump and China’s Xi Jinping while also assessing fresh economic data. In the US, retail sales slowed as expected but continued to signal resilient consumer spending. Headline retail sales rose 0.5% in April, while core retail sales, which feed directly into GDP calculations, also increased 0.5%. Earlier this week, both CPI and PPI data pointed to renewed inflationary pressures linked to the energy shock caused by the outbreak of war in Iran. Markets now expect the Federal Reserve to keep interest rates unchanged for the rest of the year, although traders still price in roughly a 28% chance of a 25 basis point rate hike in December.

The dollar index hovered around 98.5 on Thursday and was up sharply this week as accelerating US inflation linked to the Iran war reinforced expectations that the Federal Reserve will keep interest rates higher for longer or potentially raise them. Data released Wednesday showed US wholesale inflation climbed in April at its fastest pace since 2022, following Tuesday’s report indicating consumer inflation rose to 3.8% last month, the highest level since May 2023. Markets have now fully priced out any possibility of a Fed rate cut this year and are increasingly assigning a higher probability to a rate hike before year-end. Meanwhile, the US Senate narrowly confirmed Kevin Warsh as Fed chair on Wednesday, with investors assessing whether he will maintain the central bank’s independence. Elsewhere, President Donald Trump is scheduled to meet Chinese President Xi Jinping, with discussions expected to focus on trade relations rather than the ongoing Iran conflict.

The dollar index strengthened above 98.5 on Wednesday, marking a third consecutive session of gains as investors increased bets that the Federal Reserve will keep interest rates higher for longer amid rising inflation pressures linked to the war in Iran. Market sentiment turned more hawkish after data showed US wholesale inflation accelerated in April to its fastest pace since 2022, driven in part by higher freight and transportation costs stemming from Middle East disruptions. The producer price index climbed 6% year on year, exceeding all forecasts, while the monthly increase was also the strongest since 2022. Core producer prices, which exclude food and energy, rose 5.2% from a year earlier, the largest increase in more than three years. Even if the current ceasefire holds and the Strait of Hormuz reopens soon, economists expect elevated energy and shipping costs to continue weighing on inflation as supply chains and oil production gradually normalize.