The U.S. dollar remained close to a one-month low on Thursday, as subdued inflation data bolstered expectations that the Federal Reserve may maintain a patient approach regarding interest rate increases. Meanwhile, the intensification of hostilities in the Middle East introduced additional upside risks to the inflation outlook. The greenback slipped against the Japanese yen for the third trading session, by 0.1% to 162.075 yen. The euro was 0.1% higher at $1.1472, marking its strongest level in a month. Sterling remained close to a two-month peak at $1.354, driven by market anticipations that the new prime minister of Britain will select a finance minister with a fiscally conservative approach.

The Australian and New Zealand dollars experienced a decline of approximately 0.1%, trading at $0.6995 and $0.5842 respectively. The U.S. dollar index, which tracks the currency against six peers, was little changed at 100.47, hovering near its lowest since June 18. It has decreased by 0.8% over the last two sessions and is poised for a weekly downturn. U.S. producer prices experienced an unexpected decline in June, marking their most significant drop in 14 months. This development contributes to the growing evidence that inflation was moderating prior to the recent escalation in the Middle East. The data, along with unexpectedly subdued consumer inflation and a deceleration in job growth in June, effectively eliminate the possibility of a Fed interest rate increase this month.

Chances for a walk in July were reduced to 11%, compared to an implied probability of 45% at the beginning of the week. Markets continue to reflect a balanced probability of a minimum 25 basis-point hike in September, as indicated by Fed funds futures prices from CME Group. “The recent dollar weakness appears to be a correction from previous highs. Markets had aggressively priced in a July rate hike, which now looks somewhat ​overblown given that inflation ​is cooling fast,” said ⁠Bosco Wu. However, the tightening trajectory remains in place, as a single month of cooling data is improbable to indicate a lasting slowdown in inflation. Additionally, the escalation in the Middle East is expected to constrain any potential decline for the greenback, Wu stated.

The escalation in hostilities between the U.S. and Iran has kept oil prices near one-month highs, thereby sustaining pressure on the inflation outlook. The U.S. targeted Iran’s coastal defences and missile installations on Wednesday, following the re-imposition of a naval blockade on its ports. In response, Iran threatened to curtail additional regional energy exports, asserting that it was involved in a “existential war” with America. Oil prices experienced an increase for the fourth consecutive day on Thursday, with Brent crude futures trading close to a one-month high at $85.28 a barrel.