The dollar fell on Wednesday after data showed that consumer prices rose less in May than economists expected, but pared losses after updated interest rate projections from Federal Reserve officials showed the expectation of only one rate cut this year.
The consumer price index (CPI) remained flat on the month, below expectations for a 0.1% increase. Core prices rose 0.2%, below economists’ forecasts for a 0.3% increase.
That has bolstered expectations that the U.S. central bank will make two 25 basis point rate cuts this year, the first of which is likely to come in September. But the Fed’s “dot plot,” showing just one cut this year, has clouded that view.
“Fed members were clearly unaffected by today’s CPI report, or were reticent to make a last-minute change to their forecasts,” said Adam Button, chief currency analyst at ForexLive in Toronto.
Fed policymakers in March predicted three rate cuts this year. The US central bank on Wednesday also
postponed the start of rate cuts
maybe until December.
Fed Chairman Jerome Powell said after the meeting that the interest rate forecast is “
quite conservative
” and may not be confirmed by future data, and is subject to revision.
But he was not as explicit about the possibility of a rate cut in September as some investors had expected.
“Many in the market thought Powell might start targeting a rate cut in September, and instead he didn’t offer any kind of new hints about easing,” Button said. “This led to buying some U.S. dollars.”
The dollar index fell 0.5% on the day to 104.73, after earlier falling to 104.25. It hit a four-week high of 105.46 on Tuesday.
The greenback was also lower as the benchmark 10-year Treasury yield briefly hit its lowest level since April 1, at 4.25%.
Fed funds futures traders are pricing in a 63% chance of an interest rate cut by September, down from more than 70% on Wednesday, according to CME Group’s FedWatch tool.
Rate cut expectations have been volatile over the past week, with traders reducing bets on a cut in September after Friday’s US jobs report for May showed that Employers added more jobs than expected during the month. Wage inflation also rose more than expected.
Thursday’s producer price data is the next point of reference for clues about the likely trajectory of the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge.
“A weak number could tip risks towards a lower core PCE number at the end of the month,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto.
The euro gained 0.63% to $1.0807 and reached the $1.0852 level. It had fallen to $1.07195 on Tuesday, its lowest level since May 2.
The single currency came under pressure after far-right parties gained ground in European Parliament elections, prompting French President Emmanuel Macron to call snap elections in his country, to be held in two rounds on June 30 and July 7 .
Macron reiterated on Wednesday that he will not resign if his party does not win the election. Marine Le Pen’s National Rally is the most popular party in France ahead of the parliamentary elections.
The Bank of Japan also meets this week and is expected to keep interest rates steady and consider whether to offer clearer guidance on how it plans to shrink its huge balance sheet.
The dollar fell 0.17% to 156.8 yen, after hitting a one-week high of 157.40 on Tuesday.
The yen’s drop to 34-year lows of 160.245 per dollar in late April triggered several rounds of Japanese official interventions totaling 9.79 trillion yen ($62 billion).
In cryptocurrencies, bitcoin gained 1.85% to $68,527.
