Investing

The US Dollar Nears 15-Month Low as FOMC Decision Looms

Tim Fries

Published: July 18, 2023 6:55 am

Last Updated: July 18, 2023 10:28 am

The US Dollar Index plummeted to nearly the lowest level since April 2022 on Tuesday, less than a week after the Bureau of Labor Statistics reported a steep drop in inflation. Next week, the Federal Open Market Committee (FOMC) is set to hold its next meeting, which is expected to announce another 25 BPS hike.

Dollar Weakening Amid Cooling Inflation

The US dollar fell to the lowest level in almost 15 months against a basket of major currencies on Tuesday as investors awaited new developments to assess potential downward movements, following last week’s U.S. inflation figures that turned out to be lower than anticipated. The US dollar index, a gauge of the greenback’s performance against its six rival currencies, dropped to 99.587, near its April 2022 low.

The drop represents the latest slide in the world’s reserve currency, showing signs of weakness lately as cooling US inflation raised expectations that the Federal Reserve would hike interest rates once this year. In such an event, the dollar’s yield advantage over its peers would be at risk.

Last week, the latest consumer price index (CPI) print showed that inflation fell to 3% in June, with core CPI dropping more than expected to 4.8%. The reading represented a significant cooling in inflationary pressures from the 9.1% peak in June 2022.

A day later, the producer prices index (PPI) report reinforced the view that inflation is receding. Specifically, the PPI saw an annual increase of 0.1% in June, marking the smallest year-over-year jump in almost three years.

Fed Expected to Hike Rates by 25 BPS at July’s Meeting

The dollar’s plunge toward its 15-month low comes ahead of next week’s FOMC meeting, where the US central banks deliver another 25 basis points (BPS) interest rate hike. However, that could well be the last one this year.

The Federal Reserve slammed the brakes at its June meeting following a series of consecutive 10 rate increases. According to the CME FedWatch tool, the Fed is expected to raise rates again on July 26. If it does, it will bring the fed funds target range to between 5.25% and 5.5% – the highest in almost 22 years.

The latest developments suggest that the Fed is successfully pulling off a “soft landing” for the US economy, which involves mitigating inflation while avoiding a recession. Earlier this month, the most recent jobs data report showed the red-hot labor market – one of the most stubborn inflation drivers – was also cooling down.

This article originally appeared on The Tokenist