- The dollar gives previous profits as the impact of the strong inflation figures of the US decreases.
- High interest rates of Fed interest for a longer time will probably keep the short positions in the US dollar limited.
- Investors will be attentive to US IPP data later today to confirm inflationary trends.
The US dollar is withdrawing from the maximum of three weeks of 98.25, reached on Tuesday, after the publication of the figures of the US consumer price index. The dollar cuts some losses in the early European session on Wednesday, returning to levels below 98.00, but keeps intact its broader upward trend.
On Tuesday, the June US CPI confirmed that the impact of the highest tariffs on imports is beginning to filter through the economy. The general inflation accelerated at an interannual rate of 2.7% from the previous 2.4% and the underlying CPI rose to an annual rate of 2.9% from 2.8% in May. Consumer inflation month by month grew 0.3% and 0.2% respectively.
High interest rates hopes for longer are supporting USD
These figures justify the caution call of the president of the FED, Jerome Powell, when evaluating the real impact of Trump’s tariffs on prices and have led investors to cut their bets on interest -rates cuts in the coming months. This will probably keep the American dollar decline attempts limited.
The president of the Fed of Dallas, Lorie Logan, supported this earlier opinion on Wednesday, defending the need to maintain interest rates at the current level for some time, to maintain inflation at low levels in the midst of upward risks derived from Trump’s tariffs.
With this in mind, the approach today is in the US Production Price Index to confirm the highest inflationary trends. In this case, however, the market consensus anticipates a slight decrease, which could contribute to improving the feeling of the market and would push the US dollar down.
Inflation – Frequently Questions
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is often expressed as an intermennsual and interannual percentage variation. The underlying inflation excludes more volatile elements, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. The underlying inflation is the figure on which economists focus and is the objective level of central banks, which have the mandate of maintaining inflation at a manageable level, usually around 2%.
The consumer price index (CPI) measures the variation in the prices of a basket of goods and services over a period of time. It is usually expressed as an intermennsual and interannual variation. The underlying IPC is the objective of the central banks, since it excludes the volatility of food and fuels. When the underlying IPC exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
Although it may seem contrary to intuition, high inflation in a country highlights the value of its currency and vice versa in the case of lower inflation. This is because the Central Bank will normally raise interest rates to combat the greatest inflation, which attracts more world capital tickets of investors looking for a lucrative place to park their money.
Formerly, gold was the asset that investors resorted to high inflation because it preserved their value, and although investors often continue to buy gold due to their refuge properties in times of extreme agitation in the markets, this is not the case most of the time. This is because when inflation is high, central banks upload interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost to keep gold in front of an asset that earns interest or place money in a cash deposit account. On the contrary, lower inflation tends to be positive for gold, since it reduces interest rates, making bright metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
