Title: Dollar Weakens as U.S. Rate Hike Expectations Ease
Date: July 13, 2022
The dollar continued its downward slide in Asia on Thursday, as traders interpreted slower U.S. inflation as a signal that interest rate hikes would soon come to an end. This expectation pushed the dollar index below 100.5, reaching its lowest level since April 2022.
The weakening trend of the dollar, which has been ongoing for the past six weeks, experienced its steepest decline in five months on Thursday. Against the euro, the dollar fell over 1% to its lowest point in more than a year.
The euro and the yen reached new highs during Asian trading. The euro hit a 15-month high of $1.1148, while the yen reached its strongest level since mid-May at 138.08 per dollar. The U.S. dollar index also fell slightly to 100.42, its lowest level since April 2022.
The U.S. core inflation for June came in at 0.2%, below market expectations of 0.3%. The headline annual CPI fell to 3% from a peak of 9.6% a year earlier. These figures, combined with the anticipation of a Federal Reserve rate hike later this month, have led to a reduction in expectations for further rate increases.
Imre Speizer, a strategist at Westpac, stated, “The view is that the Fed will very likely hike at the end of July, and that will be the last one.”
Other major currencies, including the Australian dollar, New Zealand dollar, Swiss franc, and British pound, also experienced gains against the dollar, reaching new milestones. The Chinese yuan remained steady near a one-month high, while emerging market currencies across Asia rallied.
In Scandinavia, inflation remains a concern, and central bankers project further rate hikes. As a result, the Swedish and Norwegian crowns achieved weekly gains of 5%.
Currency analyst Steve Englander from Standard Chartered noted, “We think the recent dollar underperformance reflects a qualitative shift in market comfort with being short dollars as the terminal Fed policy rate looks increasingly capped.”
Speculation regarding the Bank of Japan’s (BOJ) yield control policy also affected the yen, which has been leading gains. The closely-watched 10-year yield fell slightly to 0.46% on Thursday, indicating only modest speculation of a policy shift.
Upcoming events, such as the European Central Bank meeting minutes, European industrial production data, and British monthly GDP, will provide further insights into the currency markets.
As expectations of U.S. interest rate hikes peak in July, the dollar’s value continues to be battered. The diminishing prospects of further rate increases and slower inflation data have undermined the dollar’s strength, leading to gains for other major currencies across the globe.
Reporting by Tom Westbrook; Editing by Jamie Freed and Kim Coghill