The US Dollar (USD) experienced a notable selloff this week, driven by a second consecutive downside surprise in US inflation data, which reduced expectations for near-term Federal Reserve (Fed) tightening. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) for June came in softer than anticipated, with the PPI declining by 0.3% month-on-month and rising 5.5% year-on-year, well below the market forecast of 6.2% [1][3][4][5][6][8]. As a result, market pricing for a July Fed rate hike dropped sharply, with the CME FedWatch tool showing odds falling to 10% from 24% a week ago, and to 10.2% from 31% a week prior according to different sources [4][5]. The USD Index lost about 0.5% on Wednesday and stabilized around 100.50 early Thursday [3].
Despite the softer inflation data, the downside for the USD has been limited by rising oil prices and escalating geopolitical tensions in the Middle East. US Central Command (CENTCOM) launched strikes on Iran, with reports of explosions in several Iranian cities, while Iran retaliated against US assets in Kuwait, Bahrain, and Jordan [2][5]. US President Donald Trump threatened further attacks on Iranian infrastructure if negotiations do not proceed, contributing to elevated energy prices and de-anchored inflation expectations [2][5]. These developments have supported safe-haven demand for the USD and capped its losses, particularly against risk-sensitive currencies [1][2][8].
Currency markets reflected these dynamics, with the USD weakening most notably against the New Zealand Dollar (NZD), which rallied nearly 3% following a recent Reserve Bank of New Zealand (RBNZ) rate hike and expectations of further tightening [3][4]. The British Pound (GBP) and Euro (EUR) also gained against the USD, supported by firm UK GDP data and a bullish technical outlook for EUR/USD, respectively [6][7]. The Canadian Dollar (CAD) weakened against the USD amid oil price volatility and caution ahead of US retail sales data, while the Bank of Canada kept its policy rate unchanged at 2.25% [2]. Against the Japanese Yen (JPY), the USD eased to around 162.00, with technical indicators showing a lack of clear trend as investors weighed geopolitical risks and Japanese policy uncertainty [8].
In commodity markets, silver (XAG/USD) tumbled to near $58.00, down 1.33%, as higher energy prices and renewed Middle East tensions de-anchored inflation expectations, prompting central banks to maintain tight monetary conditions and pressuring non-yielding assets [5]. Technical analysis indicated persistent selling pressure for silver, with key support at $55.63 and resistance at $60.75 [5].
Looking ahead, market participants are focused on upcoming US retail sales data and comments from Fed officials for further cues on the economic outlook and monetary policy trajectory [2][3][4][8]. Analysts from OCBC expect only modest USD appreciation by year-end, with carry trades favored in the current environment, while UOB sees a bullish bias for EUR/USD as long as key support holds [1][7].
CONCLUSION
Softer US inflation data has reduced expectations for near-term Fed tightening, leading to broad USD weakness, especially against currencies with hawkish central banks. However, rising oil prices and escalating Middle East tensions have limited the USD's downside, supporting safe-haven demand. Markets remain cautious, with attention turning to upcoming US economic data and geopolitical developments for further direction.