Dollar flat; Aussie slides as inflation slows

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The US dollar was barely changed on Wednesday, with resilient economic data easing investor worries over a recession and lifting risk sentiment, though that also indicated that the Federal Reserve may have to continue raising rates.

The Australian dollar fell sharply as consumer inflation eased in May.

Data showed that US consumer confidence increased in June to the highest level in nearly 1-1/2 years, while business spending appeared to hold up in May, indicating the economy remained on solid footing.

Markets are pricing in a 77% probability of a 25 basis point hike by the Fed next month, according to CME FedWatch tool, but no more after that.

Against a basket of currencies, the dollar rose 0.029% to 102.53, after slipping 0.24% overnight. The dollar index is on course to log a decline of about 1.5% for the month.

Rodrigo Catril, senior currency strategist at National Australia Bank, said US data is feeding the theme of ‘sectoral recessions’ playing with different lags, making the Fed’s job to tame inflation harder.

“Overall, the data is telling us the Fed needs to keep its foot on the tightening pedal.”

Investor attention will firmly be on Fed Chair Jerome Powell’s comments at the European Central Bank Forum in Sintra, Portugal, which could provide cues on the path of interest rates.

“We expect Powell to reaffirm his hawkish policy stance,” said Carol Kong, a currency strategist for Commonwealth Bank of Australia. “Though we doubt his comments will materially push up FOMC pricing.”

Powell will be in a panel along with Bank of England’s Andrew Bailey, European Central Bank’s Christine Lagarde and Bank of Japan’s Kazuo Ueda.

Meanwhile, the Australian dollar fell 0.72% to $0.6637 after the Australian consumer price inflation rate slowed to a 13-month low in May, driven by a sharp pullback in fuel.

A measure of core inflation also cooled, in a sign interest rates might not have to rise again in July.

The kiwi was 0.47% lower against the dollar at $0.613.

Elsewhere, the euro was down 0.1% at $1.0948, after rising 0.5% overnight following hawkish comments from ECB President Lagarde. Sterling was at $1.2734, down 0.09% on the day.

The Japanese yen strengthened 0.16% to 143.81 per dollar, but remained close to the seven-month low of 144.18 it touched on Tuesday.

Japanese authorities are under renewed pressure to combat the yen’s fresh declines driven by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation.

“With the rise in the dollar against the yen set to run further, we judge the risk has increased the Ministry of Finance intervenes in the FX market by buying the JPY,” CBA’s Kong said.

“However, we note it is the speed of change, rather than the level, that matters most in the MoF’s decision to intervene.”