The US Dollar weakened on Wednesday after retreating from a two-week peak, as lower-than-expected inflation figures reduced expectations of an imminent Federal Reserve interest rate increase.
However, lingering concerns that higher oil prices could reignite inflation continued to weigh on market sentiment.
Against the Japanese Yen, the Dollar slipped 0.05% to 162.20. Meanwhile, both the Euro and the British Pound advanced by more than 0.1%, trading at $1.1438 and $1.3403, respectively.
The New Zealand Dollar remained firmly supported at $0.5815, close to its highest level in a month, while the Australian Dollar was little changed at $0.6984.
The US Dollar index, which tracks the greenback against a basket of six major currencies, edged lower to 100.8. The index had dropped 0.35% in the previous session, its sharpest decline in nearly two weeks, after retreating from its highest level since 2nd July, Reuters reports.
Furthermore, US consumer inflation eased more than anticipated in June, with the annual inflation rate slowing to 3.5%. On a monthly basis, the headline Consumer Price Index (CPI) fell 0.4%, marking its first monthly decline since April 2020, largely due to lower energy prices.
Bond yields declined after the weaker-than-expected inflation data tempered market expectations of a near-term Federal Reserve interest rate hike. The yield on the benchmark two-year US Treasury note fell by 9 basis points from a 16-month high, reflecting investors’ reassessment of the Fed’s policy outlook.
Traders now expect the Federal Reserve to leave interest rates unchanged at its July meeting, with the probability of a rate hike dropping to just 16% following the latest inflation reports, according to CME Group’s Fed funds futures.
However, the upbeat market sentiment was partly tempered by comments from Federal Reserve Chair Kevin Warsh during his testimony before the House Financial Services Committee.
Warsh stressed that the central bank has “no tolerance” for persistently high inflation and pledged to “do my job” if faced with pressure from US President Donald Trump.
In the Gulf region, the latest escalation in the Iran conflict drove oil prices to their highest levels in a month, renewing concerns that rising energy costs could fuel inflationary pressures.
On Tuesday, President Trump reinstated a naval blockade on all Iranian ports. At the same time, the US military announced a new wave of strikes aimed at further degrading Iran’s capabilities to carry out attacks on commercial vessels transiting the Strait of Hormuz, intensifying geopolitical tensions in the region.
Elsewhere, China’s economy lost further momentum in Q2, with annual growth slowing to 4.3%, its weakest pace in more than three years. Despite the softer economic data, the Chinese Yuan briefly strengthened to a one-month high, as investors increased their expectations that Beijing would introduce additional stimulus measures to support growth.