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THE US dollar slipped on Friday (Jun 28) after data showed inflation in the world’s largest economy subsided in May, cementing expectations that the Federal Reserve will start cutting interest rates this year.
The dollar initially fell against the yen, the currency pair most sensitive to economic data from the United States because of a high, positive correlation to Treasury yields. The greenback, however, edged higher to trade flat on the day, with investors still focused on the wide interest rate differential between the US and Japan.
The dollar was last up slightly against the Japanese unit at 160.815 yen, after earlier hitting a 38-year high of 161.27 yen. Traders remained on high alert for intervention from the Japanese authorities to boost the currency.
The US currency has posted monthly and quarterly gains versus the yen of about 1.9 per cent and 5.9 per cent, respectively.
Data showed the US personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, was unchanged last month, and followed an unrevised 0.3 per cent gain in April.
In the 12 months through May, the PCE price index increased 2.6 per cent after advancing 2.7 per cent in April.
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“The PCE report was mostly in line with expectations, which confirms the disinflationary trend as shown by the CPI (consumer price index), PPI (producer price index) numbers earlier this month,” said Boris Kovacevic, global macro strategist at Convera in Vienna, Austria. “The macro data continues to point to a softening of the US economy.”
Following the inflation data, fed funds futures slightly raised the chances of easing in September to around 67 per cent, from about 65 per cent late Thursday, according to LSEG calculations. The market is also pricing between one and two rate cuts of 25 bps each this year.
A separate report on Thursday showed business activity in the Midwest came in better than expected, modestly helping the dollar. The Chicago purchasing managers’ index (PMI) jumped to 47.4 from 35 in May, and better than the 40 that economists projected.
University of Michigan consumer sentiment, meanwhile, showed a reading of a better-than-expected 68.2 for June, also dollar-supportive. In addition, respondents to the sentiment survey expect near- and long-term inflation expectations to level out at 3 per cent.
Investors will now focus on the coming US non-farm payrolls report, in which Wall Street economists are forecasting a gain of 195,000 in June, compared with 272,000 in May.
The coming “employment report will give us the opportunity to see if the job market is slowing”, said David Donabedian, chief investment officer of CIBC Private Wealth.
In other currencies, the euro was up 0.1 per cent at US$1.0709. The euro, down 1.3 per cent against the dollar in June, was on track for its biggest monthly fall since January as political uncertainty weighed in the run-up to France’s general elections.
For the second quarter, Europe’s single currency fell 0.7 per cent. Investors fear a new French government could increase fiscal spending, threatening the sustainability of the country’s public debt and the financial stability of the bloc.
Against the Swiss franc, the dollar was little changed at 0.8986 francs.
Aside from the economic data, market participants were also focused on US politics. Republican US presidential candidate Donald Trump unleashed a barrage of at-times false attacks on President Joe Biden in their first campaign debate in Atlanta, with the dollar rising as Biden stumbled over his words a few times in early exchanges.
The debate increased the odds of a Trump presidency and the imposition of import tariffs. Traders bought dollars overall as a Trump administration suggests more aggressive tariffs that could be inflationary and could trigger higher interest rates. REUTERS
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