US Dollar Index (DXY) eases below 98.00 as the dust of the US CPI settles
- The Dollar gives away previous gains as the impact from the strong US inflation figures wane.
- Hopes of high Fed rates for a longer time are likely to keep UD Dollar shorts limited.
- Investors will be looking at the US PPI data later today to confirm the inflationary trends.
The US Dollar is pulling back from the three-week high of 98.25, reached on Tuesday, following the release of hot US Consumer Price Index figures. The Greenback trims some losses on Wednesday’s early European session, returning to levels below 98.00, but maintains its broader bullish trend intact.
On Tuesday, June’s US CPI confirmed that the impact of higher tariffs on imports is starting to filter through the economy. The headline inflation accelerated to a 2.7% year-on-year rate from the previous 2.4% and the core CPI rose to a 2.9% yearly rate from 2.8% in May. Month-on-month consumer inflation grew by 0.3% and 0.2% respectively.
Hopes of high interest rates for a longer time are supporting the USD
These figures justify Fed Chairman Jerome Powell’s call for caution in assessing the real impact of Trump’s tariffs on prices and have prompted investors to trim their bets on interest rate cuts in the next months. This is likely to keep the US dollar’s downside attempts limited.
Dallas Fed President Lorie Logan supported this view earlier on Wednesday, defending the need to keep interest rates at the current level for some time, to keep inflation at low levels amid the upside risks stemming from Trump’s tariffs.
With this in mind, the focus today is on the US Producer Prices Index for confirmation of the higher inflationary trends. In this case, however, the market consensus anticipates a slight decline, which might contribute to improving market sentiment and would push the US Dollar lower.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
