Dollar falls as soft US CPI offsets Iran-driven oil spike
A weaker-than-expected US inflation report pushed the dollar lower and trimmed expectations for a July rate hike, though escalating Gulf tensions and hawkish Fed rhetoric limited the shift in market positioning.
The dollar slipped against major peers after US consumer inflation slowed more than anticipated. The US dollar index dropped to 100.81, extending a 0.35% decline from the previous session that pulled the gauge from its highest level since July 2.
Against the Japanese yen, the dollar fetched 162.08, down 0.1%. The euro rose 0.1% to $1.1433, the British pound gained 0.1% to $1.3401, and the Australian dollar held steady at $0.6983.
US headline consumer prices fell 0.4% in June, marking the first monthly decline since April 2020, driven by retreating energy prices. The year-over-year rate cooled to 3.5%. Yields on two-year US Treasuries fell 9 basis points from a 16-month high as traders recalibrated their positions.
Futures priced at the CME Group now show just a 16% chance of a Federal Reserve rate hike in July, halving the probability from prior expectations. That market optimism, however, was met with direct pushback from Federal Reserve Chair Kevin Warsh.
Testifying before the House Financial Services Committee, Warsh warned the central bank has "no tolerance" for persistently elevated inflation. He vowed to "do my job" if challenged by US President Donald Trump, signaling to investors that a single soft data point will not easily alter the central bank's restrictive stance.
Undermining the disinflationary narrative, escalating hostilities in the Gulf pushed oil prices back to one-month highs. Trump reimposed a naval blockade on all Iranian ports on Tuesday. The US military simultaneously launched fresh strikes, stating the goal is "to continue degrading Iranian capabilities used to attack commercial shipping in the Strait of Hormuz."
The New Zealand dollar was well bid at $0.5819, hovering around its strongest level in a month, reflecting broader dollar weakness. However, the combination of elevated geopolitical risks and hawkish central bank rhetoric suggests the dollar's downside may be limited. A surge in oil prices through the critical Strait of Hormuz threatens to reverse recent cooling in headline inflation metrics.
Traders are now looking past the consumer data to assess the underlying inflation trend. "One month of softer-than-expected CPI data will not close the door to interest rate hikes," said Samara Hammoud, an economist at CBA, in a note. Market participants are closely watching the US producer prices data due later today for further clarity on the Fed's policy trajectory.
