By Jiaxing Li
HONG KONG, July 16 (Reuters) – The U.S. dollar stabilised on Thursday after touching a one-month low, as soft inflation data reinforced bets that the Federal Reserve will hold off on hiking rates, while fresh Middle East tensions posed a risk to the outlook.
The euro held firm near a one-month high, last trading at $1.1465. Sterling clung to a two-month top at $1.3539, buoyed by optimism that Britain’s next prime minister will pick a fiscally conservative finance minister.
The Australian and New Zealand dollars both drifted down from multi-week highs, trading at $0.6997 and $0.5849, respectively. The Japanese yen was little changed at 162.10 per dollar.
The U.S. dollar index, which tracks the currency against six peers, was a touch stronger at 100.48, off its lowest since June 18. It had fallen 0.8% over the previous two sessions and is on track for a weekly decline.
U.S. producer prices unexpectedly fell in June, in their biggest drop in 14 months, adding to evidence that inflation was easing before the latest flare-up in the Middle East.
The data, together with surprisingly soft consumer inflation and a slowdown in jobs growth in June, effectively ruled out a Fed rate increase at its meeting this month.
Chances of a July hike have been slashed to 10% from 45% at the start of the week, while markets still see even odds of a 25-basis-point hike in September and a 70% probability of one by December, according to Fed funds futures prices via CME Group.
“The recent dollar weakness appears to be a correction from previous highs. Markets had aggressively priced in a July rate hike, which now looks somewhat overblown given that inflation is cooling fast,” said Bosco Wu, investment strategist at Bank of East Asia.
Further downside for the greenback will be limited, as one month of cooling data is unlikely to signal a sustained inflation slowdown that derails the Fed’s tightening bias, while the flare-up in the Middle East and elevated energy prices should also lend support, he added.
GULF TENSIONS KEPT INFLATION RISKS ALIVE
The latest escalation in hostilities between the U.S. and Iran have pushed oil prices back up and reignited inflation concerns.
The U.S. launched two waves of attacks on Iran’s coastal defences and missile sites on Wednesday after reimposing a naval blockade of its ports, while Iran struck back by targeting U.S. military sites in neighbouring countries in what it called an “existential war” with America.
Oil prices rose for a fourth consecutive day on Thursday, with Brent crude futures last trading near a one-month high at $85 a barrel.
South Korea’s central bank raised its benchmark interest rate for the first time in three-and-a-half years on Thursday to curb inflation, joining regional peers including Australia, New Zealand and Japan in tightening policy.
Major central banks remain biased towards further tightening, said Kimmy Tong, a strategist at Everbright Securities International.
“The market is still convinced that the Fed will deliver at least one hike in the second half of this year,” she said, adding that investors are awaiting U.S. retail sales data due later on Thursday for additional clues on the policy outlook.
(Reporting by Jiaxing Li in Hong Kong; Editing by Christopher Cushing and Kevin Buckland)
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