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Dollar pinned near 15-month low as easing inflation spurs rate peak bets
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US dollar and euro banknotes are seen in this illustration photo taken on July 17, 2022.
(Reuters/Dado Ruvic)
T
he dollar hovered at 15-month lows on Friday and was set for its worst week since November as markets wagered the Federal Reserve was close to the end of its rate hike cycle as inflation eases.
The dollar index, which measures the US currency against six major rivals, fell 0.114 percent to 99.649, having touched a fresh 15-month low of 99.574 earlier in the session. The index is down 2.5 percent for the week, its worst weekly run in eight months.
Investors have been betting on a turn in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.
US producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, data showed on Thursday, a day after data showed consumer prices rose modestly last month.
"Markets are generally pretty pleasant with the lower inflation data, because lower inflation together with the still resilient labor market supports the narrative of a soft landing in the US economy," said Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney.
"But we still maintain our view that the US will enter a recession later this year because of the impact of past and potentially future interest rate hikes."
Markets are still pricing in a 92 percent chance of a 25-basis-point hike from the Fed later this month, CME FedWatch tool showed, but no more for the rest of the year.
Data on Thursday also showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, indicating that the labor market remains tight even as job growth is slowing.
Fed officials remain cautious, with Federal Reserve Governor Christopher Waller saying he's not ready to call an all clear on US inflation and favors more rate rises this year.
Shane Oliver, head of investment strategy at AMP Capital, said the Fed is still likely to hike another 25 bps this month on concerns that services inflation remain too high and worries that stopping too early when the labor market is still tight could see inflation reignite.
"But that may be it. US inflation also led inflation in other countries on the way up so its decline augurs well for other countries".
Meanwhile, the Australian dollar was flat after Michele Bullock was appointed head of Australia's central bank on Friday, becoming its first female governor as it undertakes a sweeping reorganization.
The euro touched a fresh 16-month peak of $1.1243 in Asian hours before easing to $1.1235, while sterling last fetched $1.3140, up 0.05 percent on the day. The pound broke above $1.30 on Thursday for the first time since April 2022.
The Japanese yen strengthened 0.29 percent to 137.65 per dollar and is on course for its best week against the dollar since January.
It touched a fresh two-month peak of 137.245 earlier in the session and has swiftly moved away from the 145 per dollar level it briefly broke past last month that spurred worries of an intervention from the Japanese authorities.
The Bank of Japan is caught in a dilemma with growing prospects of sustained inflation heightening the case for an early tweak to its yield control policy, despite Governor Kazuo Ueda's reassurances he would "patiently" maintain massive stimulus.
The first test will come at the central bank's policy meeting on July 27-28, when the board is likely to revise up its inflation forecasts and signal its conviction that a demand-driven rise in prices backed by wage growth is taking hold.
In cryptocurrencies, the XRP token eased 4 percent in early Asian hours to trade at $0.7794 after surging 76 percent on Thursday.
A US judge ruled that Ripple Labs did not violate federal securities law by selling its XRP token on public exchanges.
