Dollar drops on cooler-than-expected U.S. inflation data

By John McCrank

NEW YORK, Aug 10 (Reuters) - The dollar fell broadly on Wednesday following a cooler-than-expected U.S. inflation report for July that raised expectations of a less aggressive interest rate hike cycle than previously anticipated from the Federal Reserve.

U.S. consumer prices were unchanged on a monthly basis in July as the cost of gasoline plunged, delivering the first notable sign of relief for Americans who have watched inflation climb over the past two years.

Economists polled by Reuters had forecast a 0.2% rise in the monthly Consumer Price Index (CPI) on the heels of a roughly 20% drop in the cost of gasoline.

The dollar index USD= , which measures the currency's value against a basket of currencies, was down 1.025% at 105.26 at 3:15 p.m. EDT (1915 GMT).

"This is good news for FX traders, as it was a pretty clear reaction and you will probably see that there still should be some follow-through," said Edward Moya, senior market analyst at OANDA.

The dollar was down 1.58% at 132.97 yen, with the greenback briefly down as much as 2.3% against the Japanese currency, its biggest decline since March 2020.

"In a backdrop where the market is becoming more content with FF (Fed funds) pricing, the yen's worst days appear to be over," analysts from TD Securities said in a client note. "A broad 130-135 range may be the new normal."

The Fed has indicated that several monthly declines in CPI growth will be needed before it lets up on the aggressive monetary policy tightening it has delivered to tame inflation currently running at four-decade highs.

Still, traders of futures tied to the U.S. central bank's benchmark overnight interest rate responded to Wednesday's inflation data by slashing bets that the Fed would enact a third straight 75-basis-point hike in September, and instead would opt for a half-percentage-point increase.

"What you are seeing is the market enjoying the possibility of the Fed moving toward a less hawkish, not dovish, but slightly less hawkish stance," said Quincy Krosby, chief global strategist at LPL Financial.

The euro EUR=EBS climbed 0.83% to $1.0297, while sterling GBP=D3 gained 1.16% to $1.22145, with both currencies on track for their best single-day performances since mid-June.

Minneapolis Fed President Neel Kashkari said that while the cooling in price pressures in July was "welcome," the Fed is "far, far away from declaring victory" and needs to raise the policy rate much higher than its current 2.25%-2.50% range.

Chicago Fed President Charles Evans said inflation is still "unacceptably" high, and the Fed will likely need to lift its policy rate to 3.25%-3.50% this year and to 3.75%-4.00% by the end of next year.

The Australian dollar AUD=D3 , seen as a barometer of risk, was up 1.74% at $0.7083.

Bitcoin BTC=BTSP , rattled by a drumbeat of cryptocurrency fund wipeouts and thefts over recent months, was up 2.1% at $23,651.

World FX rates Link

Reporting by John McCrank in New York; Editing by John
Stonestreet, Mark Potter and Paul Simao

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.