Dollar drops versus euro and yen, US PPI data in focus

The dollar fell versus the euro and yen on Wednesday after hitting multi-week highs the day before, as U.S. data pointed to tariff-driven inflation prompting investors to slightly scale back their bets on Federal Reserve rate cuts, Reuters reported.

Rising prices on goods as varied as coffee, audio equipment and home furnishings pulled the inflation rate higher in June, with substantial increases in prices of heavily imported items.

That shored up the dollar and pushed U.S. rates higher, with the benchmark 10-year yield down one basis point in London trade to 4.48%, after hitting 4.491% on Tuesday, its strongest level since June 11. nL1N3TC0ZB

Investors are now pricing in roughly 44 bps worth of Fed easing by December, down from just above 50 bps at the start of the week.

Against the yen, the greenback was down 0.1% at 148.65 after hitting a 3-1/2-month peak of 149.19.

The euro snapped a 5-day losing streak, and was up 0.20% at $1.1625. Sterling rose 0.15% to $1.3405 after hitting a three-week low the day before.

“Higher tariff-related goods inflation justifies their (the Fed) more cautious stance, while continued disinflation across services categories should support rate cuts in September and beyond,” said Tiffany Wilding, economist at PIMCO.

“We believe the fact that inflation is more concentrated in core goods categories will make it easier for the Fed to communicate why they are cutting rates while inflation is above target,” she added.

However, the market focus is now on U.S. producer price data to be released later in the day for further clues on whether price pressures are indeed beginning to pick up.

Against a basket of currencies, the dollar fell 0.16% to 98.46.

Also weighing on investors’ minds was the prospect that Fed Chair Jerome Powell’s eventual successor could be someone more inclined to lower interest rates.

Trump has railed against Powell for months for not easing and repeatedly urged him to resign. On Tuesday, Trump said cost overruns on a $2.5 billion renovation of the Fed’s Washington headquarters could amount to a firing offence.

“Trump’s attacks on the Fed’s independence are unlikely to stop,” said Michael Pfister, forex analyst at Commerzbank.

“A 25-basis-point cut is unlikely to satisfy him given that he is demanding 300 basis points lower rates. Accordingly, the current recovery phase (of the U.S. dollar) is unlikely to last long as well,” he added.

In trade, Indonesia said on Wednesday it had reached a deal with the United States after an “extraordinary struggle” in negotiations which resulted in a reduction of proposed U.S. tariff rates on Indonesian goods to 19% from 32%.

Trump separately said on Tuesday that a trade agreement with Vietnam was nearly complete. He also said more deals were coming, while offering fresh details on planned duties on pharmaceuticals.