During afternoon trading, the dollar index decreased by 0.1% to 102.85
The dollar weakened on Wednesday following a rise driven by higher-than-expected U.S. inflation data, as investors took profits in anticipation of upcoming economic data that could provide insight into the timing of potential interest rate cuts by the Federal Reserve later this year.
During afternoon trading, the dollar index, which compares the dollar to a basket of six major currencies, decreased by 0.1% to 102.85. Last week, it experienced its largest weekly drop since early January. Despite this, the dollar has seen a 1.5% increase so far this year.
DXY continues to be largely a bet on Fed easing; in recent weeks there has been growing concern that Fed cuts will be pushed further into 2025 or that inflation will reaccelerate, forcing the Federal Reserve to hike again, wrote Skylar Montgomery Koning, director of macro strategy at TS Lombard, in a research note.
In other words, ‘no landing’ fears have returned, she said, referring to a scenario in which the U.S. economy avoids recession with above-trend growth and above-trend inflation.
Koning further pointed out that with the U.S. economy consistently outperforming expectations, “the bias is for dollar strength, even if there are bumps along the way.”
Concerns lingered in the markets regarding the possibility of persistent inflation. The U.S. consumer price index (CPI) for February, released on Tuesday, showed a solid increase, surpassing expectations and indicating some level of inflation persistence.
While the CPI rose by 0.4% in February as predicted, the year-on-year increase of 3.2% slightly exceeded the anticipated 3.1% rise. Core figures also outperformed expectations.
Market sentiment suggests that a Federal Reserve rate cut is unlikely before the summer, with the probability of rate cuts in June slightly decreasing from 71% to about 67% earlier in the week, according to LSEG’s rate probability app.
The Federal Reserve is anticipated to maintain interest rates at their current levels during its upcoming meeting next week.
