DXY Falls after Inflation Report

The dollar index fell more than 0.5% to around 100.7 on Tuesday after softer-than-expected US inflation reduced expectations of Federal Reserve rate hikes. Annual consumer inflation slowed to 3.5% in June from 4.2% in May, below forecasts of 3.8%, as lower energy prices helped ease overall price pressures. Core inflation also moderated to 2.6%, while monthly consumer prices fell 0.4%, marking the first monthly decline since 2020. The data offset recent hawkish remarks from Federal Reserve Chair Kevin Warsh, who reiterated the central bank's commitment to restoring price stability and stressed that policymakers have no tolerance for persistently elevated inflation. Meanwhile, renewed geopolitical tensions limited the dollar's decline after the interim US-Iran peace agreement unraveled. The US resumed strikes on Iran and reinstated a naval blockade, while Tehran launched fresh attacks on shipping in the Strait of Hormuz, reviving concerns over global energy supplies.

The dollar index held around 101.2 on Tuesday after surging in the previous session, supported by safe-haven demand as President Donald Trump announced plans to reinstate a blockade on Iranian vessels transiting the Strait of Hormuz and sought reimbursement from countries benefiting from US efforts to secure the vital shipping lane. The move sent oil prices sharply higher, fueling renewed concerns that central banks may need to raise interest rates to contain inflationary pressures. Investors also awaited key US inflation data and Federal Reserve Chair Kevin Warsh’s testimony before the US Congress later today, with markets closely watching his remarks for further policy signals. Markets now price in roughly a 51% chance of a Fed rate hike in September, compared with a 23% probability that the central bank will leave rates unchanged. The dollar remained stronger against most major currencies but weakened versus the New Zealand dollar after hawkish signals from the RBNZ.

The dollar index edged up to 101 on Monday, remaining close to the levels seen throughout July, as investors assessed developments in the Middle East while evaluating the outlook for US monetary policy. Fresh military exchanges between the US and Iran, along with conflicting reports over whether the Strait of Hormuz remains open to shipping, pushed oil prices higher. Markets are also awaiting this week's US CPI and PPI reports for further insight into inflation trends, as well as Fed Chair Warsh's testimony before Congress for additional clues on the central bank's policy path. Traders are currently pricing in at least one Fed interest rate hike this year, with the probability of a September increase hovering around 71%. The dollar weakened against the euro but strengthened against the yen, as the Japanese currency came under pressure following a Reuters report that Japan has no immediate plans to alter the asset allocation of its state pension funds.