US dollar tumbles to four week low

The US dollar dropped to four-week lows on Wednesday after data showing weaker than expected US producer and consumer prices cemented the view that the Federal Reserve will not raise interest rates later in the day.

China's yuan sagged to its weakest in over six months after the central bank cut rates, and as speculation mounts that more stimulus is on the way to support the sputtering post-COVID-19 economic recovery.

The Fed is widely expected to hold interest rates unchanged at a range of between 5.0% and 5.25% later on Wednesday. For the July meeting, the rate futures market has priced in a more than 60% chance of a 25-basis-point hike.

In late morning trading, the dollar index, which measures the performance of the US currency against six others, fell 0.5% to 102.79, after touching its lowest since May 21 at 102.78.

"I look at the January 2024 fed funds futures contracts and that is implying a 5.10% rate," said Marc Chandler, chief market strategist at Bannockburn Forex in New York.

"That tells me the market says -- and it all depends on what (Fed Chair Jerome) Powell and the Fed couches their move that they're not necessarily done -- the Fed is done. I think it will be hard for the Fed to convince the market otherwise," he added.

Supporting market expectations of a pause was a report which showed that US producer prices fell more than expected in May, with the annual increase in producer inflation being the smallest in nearly 2-1/2 years.

That followed soft consumer price data on Tuesday which showed that the US consumer price index edged up 0.1% last month 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.

The dollar index was headed for its largest two-week drop since late March, having lost about 1.2% in value in that time, as the view has taken hold among investors that, while the Fed may be close to the end of its current course of rate hikes, other central banks have further to go.

"The dollar has been broadly consolidating for the most part. But I think overall the dollar has peaked," Bannockburn's Chandler said.

The Reserve Bank of Australia and the Bank of Canada last week delivered surprise rate rises, while the chances for the Bank of England to deliver a half-point rise when it meets next week have reached 20% after shock wage-growth data on Tuesday.

The euro has been steadily clawing back from 2-1/2-month lows in late May and was last up 0.5% at US$1.0845. The European Central Bank (ECB) delivers its decision on rates on Thursday, with a quarter-point hike to 3.50% widely expected.

Sterling rose 0.6% to US$1.2686, after earlier hitting its highest since April 2022 of US$1.2691.

The dollar slid 0.6% against the yen to 139.43 yen, retreating from a one-week high the day before. The Bank of Japan is expected to retain its ultra-easy policy settings on Friday.

Meanwhile, the Chinese yuan hit 7.1785 earlier, its weakest against the dollar since late November. It was last at 7.152 per US dollar, up 0.3%.

The People's Bank of China's cut a key short-term lending rate for the first time in 10 months on Tuesday and is widely expected to cut the borrowing cost on medium-term policy loans on Thursday, a Reuters poll showed.