US Dollar Index Holds Bounce

The US dollar index rose to 100.8, rebounding from the one-month low of 100.5 on July 16th and diverging with the retreat for Treasury yields amid a pivot to safer assets. Trade jitters with China retook the spotlight after President Trump claimed that China interfered with the US 2020 presidential elections. The claims jeopardized their truce in economic relations since the exchange of tariffs softened last year, magnifying ongoing shipping bottlenecks amid the war in the Middle East. Trade disputes were also featured between the EU and China, dampening demand for the Euro. On the monetary policy front, FOMC members continued to signal that evidence of stubborn core inflation may warrant a rate hike this year, backed by recent evidence of strong retail sales and low unemployment claim levels. The hawkish remarks prevailed despite soft inflation data for June and a second decline in inflation expectations per the Michigan consumer confidence survey.

The dollar index steadied around 100.7 on Friday but remained on track for a weekly decline, as softer-than-expected US inflation prompted traders to scale back expectations of near-term Federal Reserve rate hikes, although the escalating conflict between the US and Iran continued to fuel inflation concerns. The US launched multiple strikes against Iran this week, while Tehran retaliated by targeting US bases in neighboring countries. Economic data released earlier this week showed US consumer inflation increased less than expected in June, while producer prices unexpectedly fell. Retail sales also rose in line with forecasts, as lower gasoline prices weighed on receipts at fuel stations, while spending at motor vehicle dealers and online retailers remained strong. Meanwhile, initial jobless claims dropped to a two-month low of 208K. Markets have now largely ruled out a Fed rate hike this month, though expectations remain split over the possibility of a move in September.

The dollar index strengthened to 100.6 on Thursday, rebounding after losses in each of the previous two sessions, as investors assessed fresh economic data pointing to continued resilience in the US economy. Retail sales rose in line with expectations, with lower gasoline prices weighing on receipts at gas stations, while sales at motor vehicle dealers and nonstore retailers were robust. Meanwhile, initial jobless claims fell to a two-month low of 208K. Markets also continued to monitor developments in the Middle East, with oil prices hovering near one-month highs after the US intensified its strikes against Iran. Against this backdrop, markets are currently pricing in around a 12% probability of a rate hike by the Fed this month, while the odds of a hike in September stand at roughly 56%. The greenback was mostly higher against the British pound and the euro.