US Dollar Hits 14-Month Low on Cooling US Inflation

The US dollar has reached its lowest point in 14 months, causing ripples across global currency markets as traders contemplate the impact of declining US inflation on the Federal Reserve’s tightening cycle, considered to be the most aggressive in decades.

Various major currencies experienced significant movements against the weakening US dollar. The Japanese yen saw an increase of over 1 percent, consolidating its gains below 140 yen per US dollar. The euro also spiked to $US1.10, while the British pound climbed to $US1.30, both reaching their highest levels in more than a year.

The Australian dollar has risen to reach US68c. These currency movements have fueled the belief among traders that the Federal Reserve is approaching the end of its tightening cycle.

The weakening US dollar provides further support to the idea that the Federal Reserve is nearing the end of its cycle. This view contrasts with the uncertainty surrounding other major central banks, indicating a potentially weaker US dollar.

Although the US consumer price index, excluding food and energy, only increased by 4.8 percent compared to a year ago, the lowest since late 2021, it still remains above the Federal Reserve’s target. Consequently, this drop in inflation led to a decrease in the benchmark for the US dollar, hitting its lowest point since April 2022 and causing a decline in Treasury yields.

The likelihood of an additional interest rate hike by the Federal Reserve after the expected increase this month fell to below 50 percent. Following the release of the US inflation figures, 27 out of the 31 major currencies tracked by Bloomberg rose, with some nearing important thresholds.

The surge in the Swiss franc brought it close to its highest level since early 2015 when the Swiss National Bank surprised global markets by abandoning the currency’s cap against the euro. Additionally, the Canadian dollar experienced gains as the Bank of Canada raised its benchmark interest rate, while revising growth expectations upward and pushing back the timeline for inflation to reach its target.

Emerging markets also saw rallies, with the offshore Chinese yuan reaching its strongest level in three weeks. Meanwhile, an index of developing-economy currencies headed for its longest winning streak since May.

Currency strategists suggest the prevailing theme is disinflation, which is influencing market sentiment. The concept of the Federal Reserve concluding its rate-increasing trajectory by the end of July is expected to gain more credibility among traders.

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