Recent US consumer inflation data has significantly influenced financial markets, driving the dollar to its lowest level in a month and enhancing the value of most Asian currencies. This update comes after the Consumer Price Index (CPI) for April showed a rise less than anticipated, sparking debates about possible Federal Reserve interest rate cuts in September.
The softer CPI figures triggered a fall in the dollar index and its futures by 0.2% each, maintaining the steep decline from the previous night. This downturn reflects growing market optimism that inflation might continue to decrease, which could prompt the Fed to lower interest rates sooner than anticipated.
Market participants have now increased their expectations for a rate cut in September, with the likelihood now estimated at nearly 54%, up from 49% last week, as per the CME Fedwatch tool. However, the CPI still remains above the Fed's annual target of 2%. Federal Reserve officials have indicated they need more evidence of declining inflation before they adjust monetary policy.
In Japan, the yen has shown some recovery, with the USD/JPY pair dropping by 0.6 to around 154 yen. However, disappointing GDP data, showing a major contraction in the Japanese economy, has limited the yen's recovery. These figures reveal a significant drop in consumer spending during the first quarter.
The Chinese yuan saw limited gains due to negative market reactions to new US tariffs on essential Chinese industries. In Australia, the dollar showed little movement, affected by unexpected rises in unemployment that suggest a cooling labor market. These developments make further interest rate hikes by the Reserve Bank of Australia less probable.
Other currencies in the region, like the South Korean won and the Singapore dollar, have benefited from the general weakness of the dollar, making modest advances.
See how lower-than-expected US CPI boosts Asian currencies, weakens the dollar, and heightens prospects of Fed rate cuts.
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