Dollar Weakens Amid Inflation and Rate Hike Speculation

The dollar dipped as U.S. consumer price inflation aligned with expectations, easing near-term interest rate hike concerns. Despite mixed signals from economic reports, the Fed funds futures traders lowered the probability of a rate hike. Oil prices surged due to Middle East supply disruptions.

The dollar weakened on Wednesday following the U.S. consumer price inflation report that aligned with economists' expectations for July. This development eased some concerns about a potential near-term interest rate hike. Over the past year, the CPI advanced 3.4%, a slight decrease from June's 3.5%. Meanwhile, core CPI experienced a 2.5% increase, down from June's 2.6% rise. Traders have reduced their bets on a Federal Reserve rate increase at its September meeting due to unexpected job losses reported in July.

Fed funds futures traders have now priced in a reduced 40% chance of a September rate hike, down from previous estimates of 44% before the latest inflation data and 55% a week earlier. "I anticipated a softening of the dollar given the softer jobs data last week and the predicted CPI outcome. The dollar remained unexpectedly steady," said Marc Chandler, chief market strategist at Bannockburn Global Forex. Oil prices jumped on Wednesday amid volatile trading, driven by fears of disruptions to Middle Eastern supplies and a stalemate in Iran war negotiations.

The dollar index, measuring the U.S. currency against major counterparts such as the yen and euro, fell 0.12% to 99.69, while the euro rose to $1.1554. The Japanese yen increased 0.3% against the dollar to 158.84 per dollar. "The CFTC report released at the end of last week indicated a significant squeeze on speculative short yen positions due to joint intervention efforts," said Lee Hardman, MUFG's senior currency economist. Meanwhile, the New Zealand dollar remained steady after Prime Minister Christopher Luxon's confidence vote victory ahead of the upcoming general election.