Dollar fades as US inflation slows; China deal in spotlight

FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The U.S. dollar slid on Wednesday after data showed inflation in the world's largest economy rose less than expected last month, suggesting that the Federal Reserve could resume cutting interest rates sooner rather than later.

The greenback, however, briefly trimmed losses after President Donald Trump said a U.S. trade deal with China is done, with Beijing to supply magnets and rare earth minerals while the U.S. will allow Chinese students in its colleges and universities.

A White House official also said the agreement allows the U.S. to charge a 55% tariff on imported Chinese goods. This includes a 10% baseline "reciprocal" tariff, a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. China would charge a 10% tariff on U.S. imports, the official said.

In afternoon trading, the dollar slid 0.2% against the yen to 144.58, while the euro rose 0.5% to $1.1484, after briefly paring gains earlier as sentiment on the U.S. currency somewhat improved with the China news.

On the data front, the consumer price index (CPI) increased 0.1% last month after rising 0.2% in April, the Labor Department's Bureau of Labor Statistics (BLS) said. Economists polled by Reuters had forecast the CPI climbing 0.2%.

Underlying price pressures were also muted in May, with core CPI increasing just 0.1% after a 0.2% rise in April. But year-on-year inflation advanced advanced 2.4% after gaining 2.3% in April.

"Inflation momentum is slowing and that has led to the downward adjustment to U.S. interest rate expectations. Fed funds futures have started to firm up the chances of 50 basis points in cuts by yearend," said Elias Haddad, senior markets strategist, at Brown Brothers Harriman in London.

"Inflation from higher tariffs have so far been subdued, considering average tariffs in the U.S. have gone up from 2% in January to over 15%. We're not seeing the full effects yet of tariffs on inflation. I suppose we'll see the impact in the second half of the year."

Following the CPI data, traders of short-term interest rate futures had priced in a 71% chance that the Fed would cut rates by a quarter of a percentage point by September, compared with 57% before the data. Futures also factored in 50 bps in cuts, compared with 45 bps earlier this week.

The currency market, meanwhile, showed little reaction to comments from U.S. Commerce Secretary Howard Lutnick on Wednesday that the 55% tariffs imposed by the United States on China will not change. He added that trade deals with other countries can be expected starting next week.

"The worst-case scenario is probably behind us. There's a little bit of face-saving for both sides. From the U.S. point of view, the rare earth thing was a big deal," said John Praveen, managing director, at investment firm Paleo Leon in Princeton.

"They got an agreement. The question is whether it will be implemented. The fact they have some kind of agreement is probably at least a relief for the market. ... The fact that things are de-escalating is the important point," Praveen said.

Against the Swiss franc, the greenback was 0.3% lower at 0.8205 franc.

Versus China's offshore yuan, the dollar edged higher, up 0.1% at 7.197.

Sterling, meanwhile, rose against an overall weak dollar, gaining 0.3% to $1.3542. Britain's multi-year spending review underlined fiscal challenges, dividing up more than 2 trillion pounds ($2.7 trillion) of public spending to boost growth.

Currency

bid

prices at

11 June

07:45

p.m. GMT

Descripti RIC Last U.S. Pct YTD Pct High Low

on Close Change Bid Bid

Session

Dollar 98.647 98.964 -0.31% -9.07% 99.224 98.5

index 22

Euro/Doll 1.1484 1.1426 0.52% 10.94% $1.15 $1.1