The dollar gained on Thursday, despite a weak May U.S. producer price inflation report, after the Federal Reserve struck a hawkish tone at the end of its meeting on Wednesday.
Data on Thursday showed that US producer prices unexpectedly fell in May, with the main producer price index (PPI) falling 0.2% last month, after recording an advance of 0.5% not revised in April. Core prices remained flat, after recording a 0.5% increase the previous month.
The news comes after the US consumer price index (CPI) was weaker than economists expected on Wednesday, causing a sharp sell-off in the greenback.
Together, the CPI and PPI releases make it likely that Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, will also show softening of price pressures.
Today’s PPI comes on the heels of a softer-than-expected CPI… which will fuel what is likely to be a somewhat softer core PCE deflator when we receive it at the end of the month, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
But optimism about cooling inflation was not enough to keep the dollar lower.
The U.S. currency rebounded after Fed officials on Wednesday unexpectedly forecast just one interest rate cut this year and pushed back the start of rate cuts to perhaps December.
Fed Chairman Jerome Powell said policymakers are content to leave rates where they are until the economy sends a clear signal that something else is needed through a more convincing decline in lending pressures. prices or a jump in the unemployment rate.
Other data on Thursday showed the number of Americans filing new claims for unemployment benefits rose to a 10-month high last week.
The dollar index was up 0.49% at 105.20. It hit a four-week high of 105.46 on Tuesday, before falling as much as 1% after Wednesday’s CPI data.
“The reaction (to the CPI) was a bit overdone. It was almost a relief that it wasn’t worse. And that’s what triggered such a strong reaction,” said Fiona Cincotta, market strategist at City Index.
Traders had scaled back bets on the Fed cutting in September after Friday’s May jobs report showed stronger-than-expected jobs growth, while wages also rose more than expected.
However, these bets were revived following Wednesday’s CPI report.
Fed funds futures traders now see two cuts this year as likely, with a first cut in September seen as a 68% chance, according to CME Group’s FedWatch tool.
The dollar is likely to remain supported as the Fed’s policy contrasts with more cautious international central banks.
I’m not convinced the dollar top is in place with this move, Chandler said. We may not yet be at the peak of political divergence.
The European Central Bank and Bank of Canada have started cutting rates and may cut again before the Fed begins easing.
Uncertainty over the European elections could also hurt the euro against the greenback.
Political uncertainty in Europe is enough to keep the dollar in supply, Chandler said.
Far-right parties gained ground in Sunday’s European Parliament elections, prompting French President Emmanuel Macron to call a snap election in his country.
The euro fell 0.65% to $1.0739. It fell to $1.07195 on Tuesday, its lowest since May 2, before jumping to $1.08523 on Wednesday as the dollar weakened.
The yen fell even before the Bank of Japan concludes its two-day meeting on Friday, when it will consider scaling back bond purchases, taking a key first step toward trimming its nearly $5 trillion balance sheet .
The yen suffered in particular from the wide divergence between Japanese and US interest rates.
The dollar rose 0.11% to 156.89 yen.
In cryptocurrencies, bitcoin fell 1.86% to $66,801.
