US Dollar Weakens Against Euro as Inflation Data Misses Estimates

The US dollar declined against the euro on Friday to touch its weakest level in 3 days, as fresh data for inflation rate in the United States disappointed investors. Weak economic releases in recent weeks lowered expectations that the Federal Reserve might raise interest rates before the end of the year, which weighed on the greenback.

The US Bureau of Labor Statistics said that the consumer price index increased 0.1% between June and July on a seasonally adjusted basis, which missed analyst estimates of a 0.2% gain. Over the last 12 months, the index rose 1.7%, which was slightly more than the 12-month gain in June.

The increase in July was attributed to higher prices for shelter, medical care, and food. On the other hand, energy prices had a slight drop despite bigger electricity costs. The core consumer price index, which measures price changes of goods and services excluding food and energy, also rose 0.1% in July. The reading, which came short of expectations of a 0.2% increase, was the fourth reading in a row at the same level.

Greater recreation and apparel costs and pricier airline fares added to increases in shelter and medical care costs and moved the core consumer price index higher last month. However, negative pressures from lower new vehicles and home furniture prices limited the gain.

Over the last 12 months, the core consumer price index, which is viewed by the Federal Reserve as one of the main indicators for inflation, rose 1.7%. The rate might slow down the central bank’s plans for higher interest rates, since the bank holds its target for inflation at 2.0%.

The Federal Open Market Committee will have 3 more monetary policy meetings before the end of the year, but expectations of an interest rate hike weakened in the light of recent data. The CME Group FedWatch tool, which tracks prices of federal funds futures to calculate bets investors take on future monetary policy, showed 35.2% chance of higher rates in December.

Two officials from the Federal Reserve spoke in support of a slower approach to higher interest rates today. Dallas Federal Reserve President Robert Kaplan said in a speech at the University of Texas at Arlington that the Federal Reserve should patiently wait before raising interest rates again. Kaplan added that the central bank needs to see more evidence of inflation before tightening its monetary policy one more time.

Minneapolis Federal Reserve President Neel Kashkari also supported this view in a speech in Minnesota. Kashkari said that inflation has not been following gains in the labor market, with today’s report on inflation supporting the case for more time before hiking interest rates. Both officials are members of the Federal Open Market Committee.

EUR/USD rose to 1.1811 as of 16:20 GMT on Friday after touching 1.1820 at 12:35 GMT, the pair’s highest level since August 8. EUR/USD began trading today at 1.1771.

The Dollar Index, which tracks the performance of the greenback against its major peers, declined to 93.12 today, the weakest level since August 3, from 93.40 yesterday.

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