Dollar dips on soft CPI but hawkish Fed, Gulf risks limit losses
Soft US inflation pushed the dollar lower, but resurgent Gulf tensions and hawkish Fed warnings mean investors are retaining bets on further rate hikes this year.
The dollar slipped against major peers on Tuesday after softer-than-expected June inflation data briefly eased the pressure on the Federal Reserve to continue tightening monetary policy.
The dollar index fell 0.35% to 100.91, trimming its initial decline following the first semiannual congressional testimony from Fed Chair Kevin Warsh. Traders quickly scaled back their expectations for immediate policy action, with the probability of a July rate increase dropping to 16% from 42% on Monday, according to CME's FedWatch tool.
However, broader market pricing suggests investors are not fully ready to write off further tightening. The odds of a rate hike at some point this year remain robust at 80%, down only slightly from 89% the previous day. This persistent caution is being driven by a sharp escalation in geopolitical risks that threaten to reverse any progress on price pressures.
U.S. and Iranian forces have resumed trading attacks in the Gulf, bringing maritime traffic through the Strait of Hormuz to a near-standstill. The disruption pushed crude oil above $85 a barrel, reviving fears of energy-driven inflation just as domestic data showed signs of cooling.
Federal Reserve officials have made it clear that a single soft consumer price report will not pivot their stance. Warsh warned lawmakers that the central bank has "no tolerance for persistently elevated inflation." He added that if the Fed gets policy right, "the inflation surge of the last five years will be a thing of the past." Governor Christopher Waller echoed this sentiment on Monday, stating rates may need to rise "in the near term" if inflation remains well above the 2% target.
The geopolitical landscape has also shifted with U.S. President Donald Trump abandoning a proposed 20% transit fee on shipping through the Strait of Hormuz in favor of pursuing trade and investment deals.
Market participants are now weighing the transitory relief of soft domestic data against the risk of imported inflation. The dollar's ability to pare its losses after Warsh's testimony underscores the market's reluctance to aggressively bet against the greenback.
