Dollar Slides as Inflation Pace Backs Fed’s Lower-Rates Outlook

Updated on

The dollar fell for a second day as a report showed U.S. inflation is well below Federal Reserve targets, backing central bank plans for gradual interest-rate increases.

The U.S. currency weakened after the Fed cut its longer-term projections for U.S. borrowing costs, dimming the allure of dollar-denominated assets. The two-day loss for a dollar gauge is larger than declines posted in March after the Fed previously lowered its interest-rate outlook. U.S. core inflation slowed in May and the overall consumer price index was unchanged for the past 12 months while the Fed seeks an annual increase approaching 2 percent.

“The CPI numbers didn’t really help, but most of the moves that’s driving the market is from the FOMC,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. “The theme has been the gradual pace of rate increases once we get going.”

Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 peers, dropped 0.2 percent to 1,165.02 at 5 p.m. in New York, the lowest level since May 18. The dollar slid 0.2 percent to $1.1359 per euro and weakened 0.4 percent to 122.96 yen.

The U.S. currency is still the best performer during the past 12 months among currencies tracked by Bloomberg Correlation-Weighted Indexes, gaining 17 percent. In June, it’s fallen about 2 percent.

Rates Outlook

Core inflation increased 0.1 percent last month, the smallest gain this year, after climbing 0.3 percent in April, Labor Department figures showed. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2 percent rise. The overall consumer-price index advanced 0.4 percent, as fuel costs rebounded.

“CPI was a little soft, the market is still a little long the dollar, there’s potential for it to drift a little lower,” Greg Anderson, Bank of Montreal’s global head of foreign-exchange strategy, said by phone from New York.

Fed officials maintained their forecasts for the benchmark interest rate to rise to 0.625 percent at the end of 2015, while lowering it for next year and the year after. The median estimate for the end of 2016 fell to 1.625 percent, from 1.875 percent in March.

The U.S. central bank has kept its main rate at about zero since 2008.

Policy makers “really see only disadvantages to prematurely signaling liftoff,” Steven Englander, global head of Group-of-10 currency strategy at New York-based Citigroup Inc., said in a client note. “There is no better time to kick the USD than when it is already down and writhing.”

The greenback fell versus the euro as European Union President Donald Tusk said euro-area leaders will hold an emergency summit in Brussels June 22 to discuss Greece after finance ministers failed Thursday to reach agreement.

“Chances are higher than not that you’ll get a Greek deal and euro-dollar will pop above $1.15 briefly and that’s when you short it,” said Bank of Montreal’s Anderson. A short position is a bet that an asset will decline in value.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE