Dollar Retreats Amidst Soft Inflation Data

(RTTNews) - The U.S. dollar declined against major currencies during the week ended July 31 amidst weaker-than-expected inflation data from the U.S. that cast doubts on the Fed's ability to hike interest rates immediately.

During week ended July 31, the U.S. dollar inter alia declined against the euro, the British pound, the Australian dollar, the Japanese yen, the Swedish krona, the Canadian dollar as well as the Swiss franc. As a result, the Dollar Index which measures the Dollar's strength against a basket of 6 currencies dropped more than one and a half percent on a weekly basis. Here is a quick recap of the dollar's trajectory during the week ended July 31.

Amidst the anxiety ahead of the FOMC and the much-anticipated PCE data release, the Dollar Index traded between the weekly high of 101.64 recorded on Tuesday and the weekly low of 99.69 recorded on Friday.

The Federal Reserve had on Wednesday maintained the target range for the federal funds rate at 3.5 to 3.75 percent as expected. But three members of the FOMC voted for a hike, which added to uncertainty about the Fed's likely action in September. However, data for June released by the U.S. Bureau of Economic Analysis on Thursday morning showed the core PCE price index increasing by 0.1 percent. Markets had expected the Federal Reserve's preferred gauge of underlying inflation in the U.S. economy to rise 0.2 percent.

The softer-than-expected inflation print helped global markets tone down expectations of a rate hike in September. According to the CME FedWatch tool that tracks the expectations of interest rate traders, the expectations of a pause by the Fed in September increased to 33 percent on Friday, from 19 percent on Monday.

The index eventually closed the week's trading at 99.91, implying a plunge of 1.54 percent from the level of 101.47 on July 24. The decline is mainly attributed to markets tempering expectations of a rate hike by the Federal Reserve, after the release of the PCE inflation data. Recent currency market intervention that triggered the Japanese yen's rebound also weakened the Dollar Index.

Bolstered by the dollar's weakness, the EUR/USD pair jumped 1.41 percent during the week ended July 31. The common currency's surge against the greenback came also amidst better-than-expected GDP readings for the second quarter that strengthened the case for a rate hike by the European Central Bank in September. From the weekly low of 1.1353 touched on Tuesday, the pair climbed to a high of 1.1547 on Friday. The pair eventually closed the week at 1.1528, versus 1.1368 a week earlier. Flash readings released on Friday showed Eurozone consumer price inflation rising to 2.9 percent, up from 2.8 percent in June and matching market expectations.

The British pound rallied 1.2 percent against the greenback during the week ended July 31. The GBP/USD pair which had closed at 1.3324 on July 24 closed trading for the week ended July 31 at 1.3482. The weekly trading range was wider, between a low of 1.3272 recorded on Tuesday and a high of 1.3496 recorded on Friday. The Bank of England had on Thursday left its Bank Rate unchanged at 3.75 percent, while three policymakers preferred a 25-basis-point increase to 4.0 percent.

The Australian Dollar rallied more than half percent against the U.S. Dollar during the past week. The AUD/USD pair rallied from the level of 0.6981 recorded on July 24 to close the week ended July 31 at 0.7023. During the week, the pair oscillated between a low of 0.6922 recorded on Wednesday and the high of 0.7046 recorded on Friday. Data released on Tuesday had showed month-on-month inflation unexpectedly decreasing 0.10 in June, defying expectations of a 0.2 percent rise.

The U.S. dollar tumbled against the Japanese yen also during the week ended July 31. The USD/JPY pair closed the week at 157.58 versus 163.85 a week earlier, registering a loss of 3.83 percent. During the week, the pair oscillated between the high of 163.96 recorded on Tuesday and the low of 157.58, touched on Friday as markets reacted to a government intervention in the currency market and Bank of Japan's status quo on interest rates.

Amidst expectations of renewed dialogue between the U.S. and Iran to end the Middle East war, the U.S. dollar has retreated, dragging down the Dollar Index. The decline in crude oil prices amidst optimism surrounding a potential agreement that could reopen the Strait of Hormuz as well as the U.S. refraining from striking Iran over the weekend, also weighed on the greenback. The six-currency Dollar Index touched a low of 99.66 and is currently trading at 99.82, implying an overnight decline of 0.09 percent from Friday's closing level of 99.91.

The EUR/USD pair has slipped to 1.1517 from 1.1528 at close on Friday. The GBP/USD pair is currently trading 0.25 percent lower at 1.3448 versus 1.3482 on Friday. The AUD/USD pair is currently trading 0.44 percent lower at 0.6992 versus 0.7023 on Friday. Amidst the yen's rebound, the USD/JPY pair is now trading 0.67 percent lower at 156.52 as compared with the level of 157.58 recorded at the end of the previous week. The yen strengthened amidst reports quoting Japan's finance minister as saying the ministry stepped into the currency market last week to buy the Japanese yen in coordination with the U.S. Department of Treasury.