A softening of price pressures in the U.S. rekindled expectations of rate cuts, contributing to a decline in the U.S. dollar against several major currencies during the week ending August 16. The dollar weakened against the euro, British pound, Australian dollar, Canadian dollar, and Swedish krona, while maintaining stability against the Japanese yen and Swiss franc. The Dollar Index (DXY) also marked its fourth consecutive week of decline.
The Dollar Index, which measures the dollar's strength against six key currencies—the euro, British pound, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc—fell by 0.72% during the week ending August 16. The euro, which accounts for nearly 58% of the index, played the most significant role in this decline.
Starting from 103.14 on August 9, the DXY dropped to 102.40 within a week. It reached its weekly high of 103.31 on Monday and its low of 102.27 by Wednesday.
Data released on Tuesday by the U.S. Bureau of Labor Statistics showed a decrease in factory gate prices to 0.1% in July from 0.2% the previous month. Markets had anticipated steady producer price inflation at 0.2%. The core component unexpectedly stayed flat, as opposed to the expected drop to 0.2% from 0.3% in the prior month.
Wednesday's data from the Bureau of Labor Statistics revealed that annual headline consumer price inflation declined to 2.9% in July, contrary to expectations of it remaining steady at 3%. The core component also fell as expected to a three-year low of 3.2% from 3.3% in June. On a month-over-month basis, inflation rebounded as predicted to 0.2% from -0.1% in June, with the core component edging up to 0.2% from 0.1%.
This easing in price pressures brought the DXY down to 102.61 at Tuesday's close and to 102.60 on Wednesday.
Meanwhile, Thursday's data from the U.S. Department of Labor showed that unemployment benefit claims dropped to 227,000 in the week ending August 10, beating market expectations of 235,000 and the prior week's level of 234,000.
The U.S. Census Bureau also reported a rebound in retail sales by 1% in July, significantly above the market expectation of 0.3%, following a 0.2% decline the previous month. These data points underscored the strength of the U.S. economy, helping the DXY rise to 103.04 by Thursday's close.
However, the DXY faltered again on Friday following disappointing updates on building permits and housing starts. Friday's data from the U.S. Census Bureau showed a 4% month-on-month decline in building permits, compared to a 3.9% increase the previous month. Housing starts also fell by 6.8%, following a 1.1% rise in the previous period. Subsequently, the DXY closed the week at 102.40.
The EUR/USD pair saw an increase of 1.03% during the week ending August 16, driven by the softer dollar and renewed anticipation of Federal Reserve rate cuts, along with concerns over increased inflation in the Euro Area. The euro rose from $1.0916 on August 9 to $1.1028 by August 16, trading between 1.0911 and 1.1048. A Reuters poll indicating a lesser likelihood of ECB rate cuts than market expectations also supported the euro.
UK's inflation uptick in July, though less than expected, and GDP growth aligned with forecasts, along with strong labor market data, cast doubts on the Bank of England's rate cut trajectory. This helped the pound sterling surge by over 1.45% against the dollar during the week from August 10 to 16. The GBP/USD pair climbed from 1.2759 on August 9 to 1.2944 by the following Friday, ranging between a low of 1.2746 on Monday and a high of 1.2947 on Friday.
A CPI-driven weakness in the U.S. dollar and a stronger-than-expected rebound in Australia's consumer confidence also led the AUD/USD pair to record a 1.43% gain for the week ending August 16. The pair advanced from 0.6572 on August 9 to 0.6666 on August 16, with weekly trading ranging between a low of 0.6565 on Monday and a high of 0.6672 on Friday.Amidst speculation regarding the Bank of Japan's reluctance to raise interest rates amidst significant market volatility, driven by the unwinding of carry trades, the Japanese yen weakened against the U.S. Dollar in the week ending August 16. The USD/JPY currency pair fluctuated between 146.07 on Wednesday and 149.40 on Thursday, ultimately closing the week at 147.58, up from 146.61 the previous week. This depreciation occurred despite Japan's GDP growth rate rebounding by 0.8 percent in the second quarter, surpassing market expectations.
This week, the currency markets are set to be influenced by various data releases, including the Reserve Bank of Australia's minutes, Japan's trade and inflation updates, and Germany's manufacturing PMI. However, the primary focus remains on the U.S. Federal Open Market Committee (FOMC) minutes due on Wednesday and the monetary policy insights expected from the Jackson Hole symposium of central bankers later in the week. Amid strong hopes for rate cuts, the Dollar Index has declined to 102.16 from 102.40 last Friday. The EUR/USD pair has edged up to 1.1036, while the GBP/USD pair has increased to 1.2946. The AUD/USD pair has strengthened to 0.6695. Conversely, the USD/JPY pair has fallen to 146.15.
