Dollar falls to three-week low as US inflation data backs Fed pause view
The dollar dropped to a three-week low on Tuesday on news of the smallest annual increase in inflation in more than two years, cementing expectations that the Federal Reserve will pause interest rate hikes at its two-day meeting ending on Wednesday.
The dollar index slid to as low as 103.04 following the data, and was last down 0.3% at 103.30 . The euro rose 0.3% to $1.0791 , after climbing to $1.0824, its highest since May 22.
Against the yen, the dollar rose 0.4% to 140.17 yen .
The U.S. consumer price index (CPI) edged up 0.1% last month as gasoline prices fell, after increasing 0.4% in April. In the 12 months to May, the CPI climbed 4.0%, the smallest year-on-year increase since March 2021, after rising 4.9% in April.
So-called core CPI increased 0.4% in May, however, the same percentage rise for the third straight month.
"Today's report likely does not change much for tomorrow's Federal Open Market Committee decision, and our expectations have not changed: we expect the FOMC to keep interest rates unchanged, while signaling that market participants should not interpret this as the end of the hiking cycle," wrote Tiffany Wilding, managing director and economist at PIMCO, in a research note.
"Officials with a hawkish bias can point to 3-month annualized core CPI now running at 5%, very little progress across the first half of the year. However, the gradual improvement in many of the 'stickier' parts of inflation, like shelter, suggest that officials can continue to forecast improvement ahead."
Traders of futures tied to the Fed's policy rate now expect a roughly 93% chance the U.S. central bank will decide to forgo an 11th straight interest-rate hike and keep the benchmark rate at 5.00% to 5.25% on Wednesday . Before the report, traders saw a 75% chance of a June rate increase.
The rate futures market, however, trimmed bets on a Fed hike in July to a 64% probability, down from more than 70% late on Monday.
The European Central Bank's rate decision is up next on Thursday, with markets pricing in a 25 basis-point hike and another in July before a pause for the rest of the year.
The Bank of Japan, due to announce a monetary policy decision on Friday, is expected to maintain its ultra-dovish stance and yield curve control settings.
Elsewhere, sterling jumped on Tuesday after employment data came in much stronger than expected, with wages rising sharply, adding to inflation concerns.
The pound hit a five-week high of $1.2621 against the dollar and was last up 0.7% at $1.2601 as traders bet the Bank of England would have to raise rates further than previously expected.