Forex-Dollar falls after cooling producer prices, Middle East escalation in focus

The dollar fell against major currencies on Wednesday after softer-than-expected U.S. producer prices reinforced signs of easing inflation, bolstering the view that the Federal Reserve can remain patient on interest rates even as investors weighed renewed strikes on Iran. The Producer Price Index for final demand dropped 0.3% in June after a downwardly revised 0.6% increase in May, the Bureau of Labor Statistics said on Wednesday. Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1% advance in May. The dollar slipped 0.2% against the yen to 161.90 yen JPY=. The euro EUR= rose 0.51% to $1.1479, its highest since June 19. Sterling GBP= advanced 1.25% to $1.3554, its highest since mid-May, supported by news that Andy Burnham, likely to be named Labour party leader on Friday, will appoint a fiscally conservative finance minister. The U.S. dollar index =USD, which tracks the currency against six major peers, fell 0.55% to 100.36, its lowest since mid-June. It fell 0.4% in the previous session, its biggest decline in nearly two weeks, after touching its highest level since July 2. "The dollar's recent strength has largely been tied to expectations of tighter U.S. monetary policy," said Steve Kolano, chief investment officer at Integrated Partners. "Not necessarily tighter policy itself, but rather a lower probability of policy easing, as Fed funds futures are still pointing to the possibility of one to two rate hikes by the end of the year." New York Fed President John Williams said inflation remains "unquestionably too high" but may have peaked and should begin easing, adding that monetary policy is well positioned to guide it back to target. "This PPI report adds to the evidence that inflation momentum is cooling. Yesterday's CPI likely exaggerates the slowdown, but broader data suggest inflation may be past its peak," said Jeremy Schwartz, senior US economist at Nomura. "The Fed will likely remain alert to inflation risks, but recent data support our expectation that policy will remain on hold." Traders are now pricing in about a 70% chance of a December rate hike, down from around 80% yesterday, while a move later this month is seen as highly unlikely, according to LSEG data. Elsewhere, China's economic growth slowed sharply to 4.3% in the second quarter, its weakest pace in more than three years. The yuan CNY=CFXS briefly firmed to a one-month high as the data reinforced expectations of further policy support. "I see limited follow-through to the dollar's post-CPI decline," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman in London, adding that U.S. economic outperformance, the Fed's commitment to fight inflation and strong foreign demand for U.S. assets should keep the greenback supported. The latest escalation in hostilities between the U.S. and Iran kept oil prices near one-month highs, maintaining pressure on the inflation outlook. The U.S. military said it had begun a new wave of strikes on Iran at 6 a.m. ET (1000 GMT) on Wednesday, after U.S. President Donald Trump said on Tuesday that Washington had reimposed a naval blockade of all Iranian ports. The dollar has tended to benefit during flare-ups in the conflict because of its safe-haven status and the relatively limited impact of higher energy prices on the U.S. economy compared with some peers. Cooler U.S. inflation had earlier weighed on the dollar. U.S. consumer inflation slowed more than expected to 3.5% on a year-on-year basis in June, data showed on Tuesday. The headline consumer price index fell 0.4% month-on-month, its first decline since April 2020, as energy prices retreated. "The shift has taken the air out of the recent USD rally, but the technicals haven't necessarily turned over just yet," said Michael Boutros, senior market analyst at StoneX in New York. "The recent escalation in the Iranian conflict has caused a resurgence in oil and continued elevated energy prices could dampen the material progress made on the inflation front."

Forex-Dollar falls after cooling producer prices, Middle East escalation in focus

Dollar softens after cooler producer prices

Fed expectations stay on hold as inflation cools

China growth slows as dollar outlook stays supported

Middle East escalation keeps oil and inflation in focus

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