US Dollar Struggles As Producer Prices Surge, Federal Reserve Downplays Inflation

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The US dollar is slumping in the middle of the trading week as the Federal Reserve attempted to quash inflation fears that had seeped into financial markets this week. The greenback had enjoyed two consecutive session gains before snapping the winning streak. With inflation anticipated to continue over the next 12 months, will traders pour into the conventional safe-haven asset?

According to the US Bureau of Labor Statistics (BLS), the producer price index (PPI) surged to an annualized rate of 7.3% in June, up from 6.6% in May. Economists had penciled in a 6.8% increase. This represented the sixth consecutive monthly gain in producer prices. Core prices also climbed 5.6% year-over-year last month.

On a month-over-month basis, the PPI picked up 1% and core producer prices advanced 1%, more than doubling market forecasts.

This comes one day after the US government reported that the annual inflation rate surged to 5.4% in June, while the core consumer price index (CPI), which excludes the volatile food and energy sectors, jumped 0.9%.

In other economic data, mortgage applications soared 16% in the week ending July 9, up from the 1.8% contraction in the previous week, according to the Mortgage Bankers Association (MBA). The 30-year mortgage rate fell from 3.15% to 3.09%.

Fed Chair Jerome Powell spoke to the House Financial Services Committee midweek and downplayed inflationary pressures, telling lawmakers that soaring prices is “transitory.” Powell added that the US central bank will not be tapering its ultra-aggressive quantitative easing (QE) measures.

“We think inflation expectations are very very important,” Powell said. They went down at the beginning of the pandemic, and [then] they moved back up… into a range that is consistent with our 2% inflation goal over time. We watch this very carefully, and we would be very concerned if they moved materially and persistently above 2% and we would react to that.”

The US bond market was deep in the red on Wednesday, with the benchmark 10-year Treasury yield down 0.051% to 1.364%. The one-year bill dipped 0.003%, while the 30-year bond slumped 0.041% to 1.996%.

The US Dollar Index (DXY), which measures the greenback against a basket of currencies, tumbled 0.35% to 92.42, from an opening of 92.80.

The USD/CAD currency pair slipped 0.07% to 1.2506, from an opening of 1.2514, at 18:20 GMT on Wednesday. The EUR/USD rose 0.48% to 1.1834, from an opening of 1.1779.

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