Dollar Extends Fall on Soft Inflation Data

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.

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.