The US dollar tanked on Thursday after better-than-expected inflation data supported the case for a rate cut by the Federal Reserve in September. The greenback has trimmed its year-to-date gain on expectations of looser monetary policy heading into 2025. Can the buck maintain its strength in the second half of the year?
According to the Bureau of Labor Statistics (BLS), the annual inflation rate eased to 3% in June, down from 3.3% in May and below the consensus estimate of 3.1%. On a monthly basis, the consumer price index (CPI) fell 0.1%, the first month-over-month decline since the onset of the coronavirus pandemic.
Headline inflation is now at its lowest level in 12 months.
Core inflation, which omits the volatile energy and food sectors, slowed to 3.3% in June, down from 3.4% in May. This came in below the market forecast of 3.4%.
The core CPI edged up at a lower-than-expected pace of 0.1% monthly, down from 0.2% in May.
The biggest factor for falling inflation was the collapse in gasoline prices. At the same time, higher motor vehicle insurance and shelter costs contributed to above-trend inflation readings.
In other economic data, initial jobless claims eased to 222,000 for the week ending July 6, down from an upwardly revised 239,000. This was below economists’ expectations of 236,000.
Continuing jobless claims dipped to 1.852 million, while the four-week average tumbled to 233,500.
Overall, both data points suggest that the Fed will more than likely pull the trigger on a quarter-point rate cut at the September policy meeting. This was heightened when Fed Chair Jerome Powell told lawmakers on Wednesday that inflation does not need to touch 2% to cut interest rates but rather sustainably travel toward the inflation target.
The recent data impacted dollar assets.
US Treasury yields were in a sea of red ink, with the benchmark ten-year yield down nine basis points to 4.19%. The two-year yield plummeted 12.1 basis points to 4.507%, while the 30-year bond shed 7.3 basis points to 4.396%.
The US Dollar Index (DXY), a measurement of the buck against a basket of currencies, crashed 0.62% to 104.39, from an opening of 104.99. The DXY is up just 3% year-to-date and is on track for a weekly loss of around 1%.