By Smart Money Moves
U.S. Dollar Weakens as Inflation Data Supports Fed Rate Cut Expectations
On Friday, the U.S. dollar weakened after data showed that inflation in the world's largest economy subsided last month, reinforcing expectations that the Federal Reserve will start cutting interest rates this year.
Dollar Movement
The dollar initially fell against the yen, the currency pair most sensitive to U.S. economic data due to its high positive correlation with Treasury yields. However, the greenback edged higher to trade flat on the day, as investors remained focused on the significant interest rate differential between the United States and Japan.
The dollar was last slightly up against the Japanese yen at 160.815 yen, after earlier hitting a 38-year high of 161.27 yen. Traders stayed on high alert for intervention from Japanese authorities to strengthen their currency.
Dollar Performance
The U.S. currency has posted monthly and quarterly gains versus the yen of about 1.9% and 5.9%, respectively.
Inflation Data
Data revealed that the U.S. personal consumption expenditures (PCE) price index, the Fed's preferred inflation measure, was unchanged last month, following an unrevised 0.3% gain in April. Over the 12 months through May, the PCE price index increased by 2.6%, down from a 2.7% rise in April.
"The PCE report was mostly in line with expectations, which confirms the disinflationary trend as shown by the CPI (consumer price index) and PPI (producer price index) numbers earlier this month," said Boris Kovacevic, global macro strategist at Convera in Vienna, Austria. "The macro data continues to point to a softening of the U.S. economy."
Interest Rate Expectations
Following the inflation data, fed funds futures slightly raised the chances of easing in September to around 67%, from about 65% late Thursday, according to LSEG calculations. The market is also pricing in one to two rate cuts of 25 basis points each this year.
Other Economic Data
A separate report on Thursday showed that business activity in the Midwest came in better than expected, modestly helping the dollar. The Chicago purchasing managers' index (PMI) jumped to 47.4 from 35 in May, surpassing the economists' projection of 40.
Meanwhile, the University of Michigan consumer sentiment index showed a better-than-expected reading of 68.2 for June, which was supportive of the dollar. Additionally, respondents to the sentiment survey expect near- and long-term inflation expectations to level out at 3%.
Investors will now focus on next week's U.S. nonfarm payrolls report, with Wall Street economists forecasting a gain of 195,000 in June, compared with 272,000 in May.
"Next week's employment report will give us the opportunity to see if the job market is slowing," said David Donabedian, chief investment officer of CIBC Private Wealth, in emailed comments. "This number will have to be a big surprise to the downside to suggest the Fed will act in July to lower rates. We expect the Fed to stay pat unless the job market starts to falter."
Other Currency Movements
The euro was up 0.1% at $1.0709. The euro, down 1.3% against the dollar in June, was on track for its biggest monthly fall since January due to political uncertainty ahead of France's general elections. For the second quarter, Europe's single currency fell 0.7%.
Investors fear that a new French government could increase fiscal spending, threatening the sustainability of the country's public debt and the financial stability of the bloc.
Against the Swiss franc, the dollar was little changed at 0.8986 francs.
Political Focus
Aside from economic data, market participants were also focused on U.S. politics. Republican U.S. presidential candidate Donald Trump launched a barrage of at-times false attacks on President Joe Biden in their first campaign debate in Atlanta. The dollar rose as Biden stumbled over his words a few times during the early exchanges.
The debate increased the odds of a Trump presidency and the imposition of import tariffs. Traders bought dollars overall as a Trump administration suggests more aggressive tariffs that could be inflationary and potentially trigger higher interest rates.
Currency Bid Prices (as of 28 June, 04:28 p.m. GMT)
Currency Pair Last Price Change YTD % Change
Dollar Index 105.79 -0.08% 4.36%
Euro/Dollar 1.072685 0.15% -2.88%
Dollar/Yen 160.84 0.02% 14.03%
Euro/Yen 172.06 0.22% 10.79%
Dollar/Swiss 0.8985 -0.03% 6.76%
Sterling/Dollar 1.2645 0.06% -0.62%
Dollar/Canadian 1.368 -0.14% 3.21%
Aussie/Dollar 0.6674 0.4% -2.11%
Euro/Swiss 0.9629 0.12% 3.69%
Euro/Sterling 0.8474 0.07% -2.24%
NZ Dollar/Dollar 0.6095 0.19% -3.55%
Dollar/Norway 10.6637 0.39% 5.22%
Euro/Norway 11.4325 0.52% 1.86%
Dollar/Sweden 10.5942 -0.27% 5.24%
Euro/Sweden 11.3586 -0.15% 2.1%
This concise summary provides an accessible and engaging overview of the recent movements in the U.S. dollar and related economic data, making it easy for readers to understand the current financial landscape.