Dollar sinks to a 14-month low as waning inflation kills bets for further Fed interest-rate increases

An employee of a bank counts US dollar notes at a branch in Hanoi

Thomson Reuters

• The US dollar index plunged to its lowest level since April 2022 as inflation dramatically cooled again. 
• The falling greenback reflects investor expectations that the Fed's interest-rate increases may be coming to an end. 
• ""For the big dollar trend, this may be the start of the long-awaited cyclical decline," ING strategists said.

The US dollar tumbled to a 14-month low on Thursday as rapidly falling inflation fueled expectations that the Federal Reserve's interest-rate increases will end soon. 

The dollar index (DXY) – which tracks the greenback against a basket six other major currencies – last fell 0.3% to $100.28, the lowest level since April 2022. That followed a 1.1% slide on Wednesday, which was the worst single-day loss since early January.

The US currency has slumped 2.6% so far in July, on track for its worst month since November 2022. It declined accelerated after data released Wednesday showed US inflation came in at 3.0% in June annually, the lowest level since March 2021. Consumer-price pressures have steadily eased over the past year  as the Fed raised interest rates at the fastest pace in four decades.

"The downside surprise in US June CPI inflation has seen the dollar drop to new lows for the year," strategists at ING led by Chris Turner wrote in a note. "For the big dollar trend, this may be the start of the long-awaited cyclical decline. We prefer to run with the dollar bearish story for the time being, where DXY should press big psychological support at 100.00."

The dollar has been weakening since late 2022 amid speculation cooling inflation will allow the US central bank to stop raising rates, or even start cutting them in the foreseeable future. Lower interest rates tend to make a currency less attractive to international investors who seek higher yields.

The Fed has raised benchmark rates by 500 basis points since last spring, from near-zero levels to north of 5%. 

ING economist James Knightly noted that while inflation surprised on the good side, it will not prevent another 25 basis point rate hike by the Fed at its July 26 meeting, "but it will add weight to the view that the July hike may indeed be the last in the cycle."

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