Dollar Slumps as Fed Rate Hike Expectations Fade - Capital Street FX

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THE U.S. DOLLAR EXPERIENCES A DECLINE TO A ONE-YEAR LOW DUE TO COOLED INFLATION IN THE U.S.

  • The US dollar faced a slump in early European trading on Friday as the Dollar Index fell to a one-year low of 100.515, down by 0.2%, due to expectations of an early end to the Federal Reserve’s rate-tightening cycle. Investors believe that cooler-than-expected inflation data will force the central bank to cut interest rates before the end of the year, resulting in a weaker dollar.
  • The Dollar Index is on track for a weekly decline of more than 1%, which is the steepest since January. This decline followed the release of the March US producer prices index, which fell by 0.5% from the previous month, marking the largest drop since the beginning of the pandemic.
  • The PPI slowed down on an annual basis, rising by 2.7% from a year ago, the smallest gain in more than two years. Excluding the volatile food and energy components, the core PPI fell by 0.1% from February and increased by 3.4% from a year ago. Consumer prices also posted the smallest annual increase since May 2021.
  • Although the Federal Reserve is still expected to raise interest rates next month, probably by just 25 basis points, there is a growing expectation that the central bank will be cutting interest rates before the end of the year.
  • According to analysts at ING, investors are looking forward to the forthcoming Fed easing cycle, and they have a conviction call that the dollar will weaken. Therefore, they are searching for opportunities. Friday brings more economic data, including the March retail sales release, which is expected to show a monthly contraction of 0.4%, the same as the prior month, as consumers struggle with inflation that is cutting into their disposable income.

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