Dollar struggles after softer inflation blunts Fed hike bets

By Jiaxing Li

HONG KONG, July 15 (Reuters) - The ‌dollar drooped on ​Wednesday after ​tumbling from a two-week high, as softer-than-expected inflation data curbed bets on a near-term Federal Reserve rate hike, despite concerns that elevated oil prices could fuel inflation risks.

Against the yen, the dollar fetched ‌162.20, down 0.05%. The euro and the British pound both gained more than 0.1%, trading at $1.1438 ⁠and $1.3403, respectively.

The New Zealand dollar was also well bid at $0.5815, hovering around its strongest level in a month, and the Australian dollar was ‌steady at $0.6984.

The U.S. dollar index, which measures ‌the currency against a basket of six peers, was a touch weaker at 100.8. It fell 0.35% in the previous session for its biggest pullback in nearly two weeks, which dragged it down from the highest levels ​since July 2.

U.S. consumer inflation slowed more than expected to 3.5% on a year-over-year basis in June. The headline consumer price index fell 0.4% over the month, the first decline since April 2020, as energy prices retreated.

Bond ⁠yields fell after the surprisingly soft data dampened market expectations for a near-term rate hike from the Federal Reserve, with yields on 2-year U.S. Treasuries off ​9 basis points from a 16-month high.

"The sizeable downside surprise gives the Fed greater scope to remain on hold for longer," said Sim Moh Siong, FX strategist at OCBC, noting ​that central bank officials had signalled their July decision would hinge ‌on the June inflation reading.

"While we continue to expect modest USD appreciation by year-end, near-term upside momentum may remain constrained in the absence of fresh catalysts," he added.

Traders now expect that ⁠the Fed will skip a July rate hike, with the odds of one halved to 16% after the inflation reports based on Fed funds futures prices at the CME Group.

However the optimism was somewhat overshadowed by Fed Chair Kevin Warsh, who said during his ⁠testimony before the House Financial Services Committee that the central bank has "no tolerance" for persistently elevated inflation, and vowed to "do my job" ​if challenged by U.S. President Donald Trump.

In the Gulf, the latest escalation in hostilities in the Iran conflict pushed oil prices back to one-month highs, keeping inflation risks alive.

Trump on Tuesday reimposed a naval blockade of all Iranian ports, while the U.S. military said ‌they have begun a fresh round of strikes "to continue degrading Iranian capabilities used to attack commercial shipping in the Strait of Hormuz."

"One month of softer-than-expected CPI data will not close ‌the door to interest rate hikes," CBA economist Samara Hammoud said in a note, adding that markets are closely watching producer price ⁠data due later on Wednesday.

Elsewhere, China's second-quarter economic ‌growth slowed sharply to 4.3%, its lowest ​level in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations for additional policy support measures.

(Reporting by Jiaxing Li; Editing by Shri Navaratnam and ‌Kevin Buckland)

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