Written by Karen Brettell
NEW YORK (Reuters) – The dollar fell on Wednesday after data showed that consumer prices in May rose less than economists expected, but pared losses after an updated interest rate forecast by Federal Reserve officials showed an expectation of another rate cut. Only one this year.
The headline CPI stabilized during the month, below expectations for a 0.1% increase. Core prices rose 0.2%, less than economists' expectations for a 0.3% increase.
This reinforced expectations that the US central bank will cut interest rates by 25 basis points this year, with the first likely to come in September. But the Fed's “detailed chart” that showed just one cut this year has clouded that view.
“Fed members were clearly unimpressed with today's CPI report, or were reticent to make a last-minute change to their forecasts,” said Adam Patton, senior currency strategist at ForexLive in Toronto.
As of March, Fed policymakers had expected three rate cuts this year. The US central bank on Wednesday also postponed the start of interest rate cuts, possibly until late December.
Fed Chairman Jerome Powell said after the meeting that interest rate expectations are “fairly conservative” and may not be confirmed by upcoming data, and are subject to review.
But he was not as frank about the possibility of cutting interest rates in September as some investors expected.
“Many in the market thought Powell might start cutting rates in September, but instead he did not offer any kind of new hints about easing,” Patton said. “This has led to some buying of US dollars.”
The index was last down 0.5% on the day to 104.73, after falling earlier to 104.25. It reached a four-week high of 105.46 on Tuesday.
The dollar also fell as the index briefly reached its lowest level since April 1 at 4.25%.
Fed funds futures traders now place a 63% probability of a rate cut by September, down from more than 70% earlier Wednesday, according to CME Group's (NASDAQ:) FedWatch tool.
Expectations for a rate cut were volatile last week, with traders reducing their bets on a September cut after Friday's US jobs report for May showed employers added more jobs than expected during the month. Wage inflation also rose more than expected.
Thursday's producer price data will be the next focus for clues about the likely path of the personal consumption expenditures (PCE) price index, the Fed's preferred inflation indicator.
“A weak number there could steer risks toward a lower core PCE number at the end of the month,” said Sean Osborne, chief foreign exchange strategist at Scotiabank in Toronto.
The euro gained 0.63 percent to $1.0807 and reached $1.0852. It fell to $1.07195 on Tuesday, the lowest level since May 2.
The single currency came under pressure after far-right parties made gains in the European Parliament elections, prompting French President Emmanuel Macron to call for early elections in his country, to be held in two rounds on June 30 and July 7.
Macron reiterated on Wednesday that he would not resign if his camp did not win the elections. The National Rally party led by Marine Le Pen is the most popular party in France before the parliamentary elections.
The Bank of Japan also meets this week, and is widely expected to keep interest rates steady and consider whether to provide clearer guidance on how it plans to reduce its massive balance sheet.
The dollar fell 0.17 percent to 156.8 yen after trading at a one-week high of 157.40 on Tuesday.
The decline in the value of the yen to its lowest level in 34 years at 160.245 yen to the dollar at the end of April triggered several rounds of Japanese official intervention totaling 9.79 trillion yen (62 billion US dollars).
In cryptocurrencies, Bitcoin rose 1.85% to $68,527.