FX.co ★ Dollar Muted on Tame Inflation Data

The dollar index hovered around 99.9 on Friday, showing no clear direction as softer US inflation data led traders to scale back expectations for a Federal Reserve rate hike in September. Data released on Thursday showed US producer prices were flat in July, reinforcing evidence from Wednesday’s subdued CPI report that price pressures are not broadly accelerating. Easing inflation has reduced the immediate pressure on the Fed to tighten policy, with markets now assigning roughly a 35% probability to a 25-basis-point rate increase in September, down from 55% a week earlier. The latest readings also indicate that the initial inflationary effects of the Middle East conflict and higher energy costs may be dissipating. Even so, uncertainty surrounding a potential agreement to end the war and reopen the Strait of Hormuz continues to pose upside risks to the inflation outlook.