FOREX Dollar Deepens Dive on Inflation Surprise

SINGAPORE, July 13 (Reuters) – A falling dollar was pushed down in Asia on Thursday, as traders took surprisingly slow U.S. inflation as a signal that U.S. interest rate hikes will all but end by the end of the month.

The dollar has fallen steadily for about six weeks but had its worst gain in five months on Wednesday – falling more than 1% against the euro to its lowest in more than a year – as the slowdown in US inflation gave dollar sellers confidence.

The euro hit a new 15-month high of $1.1148 in Asia on Thursday and the yen hit its strongest since mid-May at 138.08 per dollar. The US dollar index fell marginally to 100.42, the lowest since April 2022.

US core inflation came in at 0.2% in June against market expectations of 0.3%. Headline annual CPI fell to 3% and has been falling since peaking at 9.6% a year earlier.

Interest rate futures showed that markets have fully priced in a rate hike from the Federal Reserve later this month, but expectations of further increases are being withdrawn.

“The view is that the Fed will very likely hike at the end of July, and that will be the last,” Westpac strategist Imre Speizer said.

The New Zealand dollar rose 0.5% to a two-month high of $0.6332 and the Aussie rose 0.4% to a three-week high of $0.6813.

The moves in other currencies were smaller but still delivered new milestones as traders expect the dollar to fall further. The Swiss franc hit its strongest since 2015 at 0.8655 to the dollar and a 15-month high of $1.3019.

The Chinese yuan stabilized near a one-month high of 7.1675 per dollar, held back by weak trade data that showed exports plunging at their fastest pace in three years.

Emerging market currencies also rose across Asia, led by Malaysia’s ringgit which jumped 1% to the strong side of 4.6 per dollar. Thailand’s baht held small gains as traders waited to see if prime ministerial hopeful Pita Limjaroenrat could command a majority in parliament.

In Scandinavia, where inflation looks sluggish and central bankers forecast further rate hikes, the currencies added to Thursday’s gains for the Swedish and Norwegian kroner to see weekly gains of 5%.

“We believe the recent underperformance of the dollar reflects a qualitative shift in market comfort with being short the dollar as the terminal Fed policy rate looks increasingly contained,” said currency analyst Steve Englander at Standard Chartered.

Two-year Treasuries, which track interest rate expectations, extended an overnight rally and drove yields down 4 basis points to 4.71%.

Among the dollar sales, an outlier was perhaps the yen, which has led to an upswing. It is up more than 4% in five sessions, but stalled in Asia as focus turned to whether the Bank of Japan (BOJ) may soon adjust its yield control policy.

The closely watched 10-year yield fell slightly to 0.46% on Thursday, comfortably below the BOJ’s 0.5% limit, suggesting only modest speculation about a policy shift as the prospect of easing inflation eases some of the pressure.

“Governor (Kazuo) Ueda has so far argued that the risk of moving too soon outweighs the risk of moving too late,” DBS strategist Chang Wei Liang said.

“Of course, the Fed entering the tail phase of rate hikes provides relief and allows the BOJ to normalize policy at its own desired pace.”

European Central Bank meeting minutes, European industrial production data and UK monthly GDP are ahead on Thursday.

Reporting by Tom Westbrook; Editing by Jamie Freed and Kim Coghill

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