Dollar Advances on Middle East Escalation

The dollar index traded around 100.5 on Thursday after posting sharp losses over the previous two sessions, as easing inflation pressures reduced expectations of a near-term Federal Reserve interest rate hike. Data released on Wednesday showed US producer prices unexpectedly fell in June for the first time in nearly a year, largely due to lower energy costs, following Tuesday’s softer-than-expected consumer inflation report. Markets trimmed expectations for a Fed rate increase in September, with the implied probability falling to around 44% from 50% a day earlier. Meanwhile, investors continued to monitor escalating attacks in the Middle East after the US launched additional strikes against Iranian targets. The renewed conflict pushed oil prices sharply higher this week, fueling fresh concerns over inflation and the interest rate outlook. Still, President Donald Trump said on Wednesday that Tehran had indicated a willingness to resume negotiations.

The dollar index edged lower to 100.7 on Wednesday after a softer-than-expected producer price report provided fresh evidence of easing inflationary pressures. Producer prices unexpectedly fell 0.3% in June, compared with expectations for no change, while both the annual headline and core measures also came in below forecasts. The report followed Tuesday's softer-than-expected CPI data, reinforcing signs of moderating inflation. Also, NY Fed President Williams said that while inflation “is unquestionably too high, there are encouraging reasons to expect that inflation has peaked”. However, escalating hostilities in the Middle East and the recent rise in oil prices continue to pose upside risks to the inflation outlook. Meanwhile, Fed Chair Warsh reiterated the central bank's commitment to restoring price stability during his congressional testimony. Markets are pricing in roughly a 49% probability of a Fed rate hike in September, below 70% last week.

The dollar index weakened below 101 on Wednesday, marking its second consecutive session of losses after softer-than-expected US inflation data reduced expectations of a near-term Federal Reserve interest rate hike. The annual US inflation rate eased to 3.5% in June from 4.2% in May, coming in below forecasts of 3.8% as lower oil prices helped moderate energy inflation. Consumer prices also fell 0.4% from the previous month, registering their first monthly decline since 2020. Meanwhile, Fed Chair Kevin Warsh reiterated the central bank’s commitment to restoring price stability during congressional testimony on Tuesday but stopped short of signaling a more hawkish policy stance. Markets continue to price in roughly a 50% chance of a Fed rate hike in September, as renewed tensions between the US and Iran lifted oil prices and kept inflationary pressures in focus.