The dollar weakened on Wednesday as investors bet that the Federal Reserve will pause its interest rate hiking cycle after soft inflation data.
The dollar index, which measures the greenback against a basket of six major currencies, fell 0.2% to 103.25. The euro rose 0.3% to $1.0800, while the British pound gained 0.2% to $1.2615.
The U.S. consumer price index rose just 0.1% in May, below expectations for a 0.2% increase. The annual rate of inflation slowed to 4.0% from 4.2% in April.
The weak inflation data has raised doubts about whether the Fed will raise interest rates by 75 basis points at its meeting later this month. The market is now pricing in a 50-basis point hike, down from a 90% chance of a 75-basis point hike before the inflation data was released.
“The Fed is likely to stay on hold at the upcoming meeting,” said analysts at TD Securities. “The data is not strong enough to justify a 75-basis point hike, and the Fed is likely to wait for more evidence that inflation is coming under control.”
The weaker dollar helped to boost commodity prices. Oil prices rose 1% to $118.50 a barrel, while gold prices gained 0.3% to $1,851 an ounce.
The Chinese yuan also weakened against the dollar on Wednesday. The offshore yuan fell to 7.1707 per dollar, its weakest level since November 2022. The weakness in the yuan came after the People’s Bank of China cut the benchmark lending rate for the first time in a year.
The PBOC cut the one-year loan prime rate by 5 basis points to 4.45%. The five-year loan prime rate was also cut by 5 basis points to 4.6%.
The PBOC said the cuts were made in response to the “current economic situation.” The central bank said it expects the cuts to help to “stabilize the economy and support the recovery.”
The weakness in the dollar and the Chinese yuan could boost exports from the United States and China. However, the weaker currencies could also make imported goods more expensive, which could lead to higher inflation.
The market will be closely watching the Fed’s decision later this month for more clues about the future direction of monetary policy.