Dollar Dips as Traders Weigh Fed’s Hawkish Tone Against Benign Inflation

The U.S. dollar retreated on Thursday, as market participants wrestled with the contrasting signals of subdued U.S. inflation and a more hawkish stance from the Federal Reserve.

The Dollar Index, measuring the greenback against a basket of major currencies, dipped 0.3% to 104.340, easing from its recent mid-May peak. This followed a volatile Wednesday, where the dollar initially fell on a flat U.S. inflation report but then recovered partially as the Fed signaled fewer rate cuts this year.

PPI Data in the Spotlight

Market focus now shifts to Thursday’s Producer Price Index (PPI) release, offering further insights into inflationary pressures. Expectations are for a modest 0.1% monthly growth in May, a slowdown from the previous month. The core PPI, excluding volatile food and energy prices, is also anticipated to show a moderation in growth.

Euro Gains on Inflation Updates

The euro strengthened against the dollar, building on overnight gains as traders digested regional inflation data. While German wholesale prices declined, Spanish consumer prices rose, adding nuance to the overall inflation picture.

Other Currency Pairs and Central Bank Watch

The British pound edged lower against the dollar, awaiting the U.K.’s upcoming CPI data. In Asia, the Japanese yen weakened slightly as traders anticipated the Bank of Japan’s (BOJ) policy meeting on Friday. The BOJ is expected to maintain rates but may scale back bond purchases to tighten policy. Meanwhile, the Chinese yuan neared six-month lows against the dollar amid reports of increased U.S. trade scrutiny on China.

The currency markets remain dynamic, with traders closely monitoring economic data and central bank signals to navigate the evolving landscape.