The dollar came under selling pressure on Tuesday after US inflation data for June came in below market estimates, prompting investors to reduce expectations for an interest rate increase in the near term.
The US Dollar Index declined 0.3% to 100.92, allowing the euro and sterling to gain 0.4% and 0.3%, respectively. The Japanese yen also recorded a limited improvement against the US currency.
The dollar movement reflected a direct shift in monetary policy expectations after the headline Consumer Price Index fell 0.4% on a monthly basis, exceeding market forecasts for a smaller decline of 0.1%.
Core inflation remained unchanged in June, compared with expectations for a 0.3% increase, giving markets another reason to reconsider the likelihood of further monetary tightening.
On an annual basis, headline inflation slowed to 3.5%, while core inflation eased to 2.6%. Both figures were below analysts’ forecasts and lower than the readings recorded in May. The data showed a clear reduction in price pressures during the month, although it did not signal the end of the inflation challenge.
Energy prices were the main factor behind the improved reading. Gasoline prices fell 9.7% in one month, while overall energy costs declined 5.7%, marking their sharpest monthly fall since April 2020.
The decline followed an interim agreement between Washington and Tehran and the reopening of the Strait of Hormuz, which allowed shipping activity to resume and reduced concerns over oil supplies. As a result, Brent crude lost more than 20% during June.
However, this supportive factor began to lose its influence rapidly in July after the truce between the United States and Iran collapsed, strikes resumed between the two sides, and Washington reimposed its naval blockade on Iranian ports and coastal areas.
The escalation pushed Brent crude more than 9% higher in a single session, reviving concerns about rising transportation and production costs and the possibility that these increases could pass through to consumer prices over the coming months.
The June inflation figures were positive for the Federal Reserve, but they did not guarantee that inflation would continue to decline. Much of the improvement came from energy prices, which remain highly sensitive to political and military developments in the Middle East.
Expectations for an interest rate increase declined after the data was released, putting pressure on the dollar. However, it remains too early to expect a complete change in the Federal Reserve’s policy stance. The central bank will need several weaker inflation readings before becoming confident that price growth is moving sustainably toward its 2% target.
Federal Reserve Chair Kevin Warsh said the June reading was better than expected, but maintained a firm stance on inflation and stressed that the central bank would not tolerate prices remaining at elevated levels.
The Federal Reserve kept interest rates unchanged in June within a range of 3.50% to 3.75%, while leaving the door open to further increases during the year if price pressures remain strong.
Warsh’s remarks indicate that the central bank does not want to commit to a predetermined interest rate path. Instead, decisions will depend on economic data and developments in the labor and energy markets. The Fed also plans to reduce its reliance on forward guidance that gives markets early indications about future policy decisions.
The Federal Reserve now faces two opposing forces. Inflation slowed during June, but oil prices have returned to the upside. Continued increases in energy costs could force the central bank to keep rates elevated for longer or consider further tightening.
In currency markets, tensions between the United States and Iran limited the dollar’s losses, as the currency retained part of its safe haven demand despite lower interest rate expectations.
President Donald Trump’s decision to abandon a proposed 20% fee on vessels receiving US protection while crossing the Strait of Hormuz also eased some pressure. However, the continuing naval blockade and military operations kept investors cautious.
Overall, the June report provided temporary support for risk assets and currencies competing with the dollar, but it did not settle the direction of monetary policy. The dollar’s next move will depend on whether inflation continues to slow, how oil prices develop, and the extent to which geopolitical tensions affect energy costs and global supply chains.
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