Dollar Muted on Tame Inflation Data

The dollar index traded around 99.9 on Friday, lacking a clear direction as subdued US inflation data prompted traders to dial back expectations for a Federal Reserve rate hike in September. Data released Thursday showed US producer prices were unchanged in July, providing further evidence that price pressures are not broadly accelerating following Wednesday’s tame CPI report. Moderating inflation reduces pressure on the Fed to raise interest rates in the near term, with markets now pricing in around a 35% chance of a 25 basis point rate hike in September, down from 55% a week earlier. The latest figures also suggest that the initial inflationary impact of the Middle East conflict and higher energy costs may be fading. However, uncertainty over a potential deal to end the wat and reopen the Strait of Hormuz continues to pose risks to the inflation outlook.

The dollar index fell to around 99.9 on Thursday after softer-than-expected US producer inflation eased concerns over renewed price pressures and strengthened expectations for a cautious Federal Reserve policy stance. The Producer Price Index was unchanged in July, missing forecasts for a 0.2% increase, while recent consumer price data also pointed to moderating inflation. As a result, traders increased bets that the Fed will leave interest rates unchanged at its September 15-16 meeting, with markets pricing around a 65% probability of a hold. The latest figures suggest that the initial inflationary impact of the Middle East conflict and higher energy costs may be fading. However, renewed tensions in the region continue to pose risks to the inflation outlook. Meanwhile, weekly jobless claims increased but remained historically low, although recent employment data indicated that the US labor market has been weaker than previously estimated.

The dollar index steadied around 100 on Thursday after experiencing heightened volatility in the previous session, as investors looked ahead to July’s producer inflation report for further clues on recent price trends. Data released Wednesday showed US consumer inflation slowed for a second consecutive month to 3.4% in July, while rising just 0.1% from the previous month. Markets now see around a 40% chance of a 25 basis point rate hike from the Federal Reserve in September, down from nearly 50% a day earlier. Meanwhile, investors continued to assess prospects for a deal to reopen the Strait of Hormuz, although escalating rhetoric between the US and Iran amid deadlocked negotiations reduced the likelihood of an imminent agreement. Elsewhere, traders remained alert for potential intervention to support the yen as the currency approaches the 160 level against the dollar.