Dollar Slumps Amid Cooling Inflation Expectations and Weakening Rate Hike Prospects

Dollar Index Hits One-Year Low on Diminished Rate Hike Expectations

The U.S. dollar weakened, reaching a one-year low in early European trade on Friday, as the market anticipates a premature end to the Federal Reserve's rate-tightening cycle due to cooler-than-expected inflation data. The Dollar Index, which gauges the greenback's performance against a basket of six other major currencies, fell 0.2% to 100.515, its lowest level since April of the previous year. Consequently, the index is set for a weekly decline exceeding 1%, its sharpest drop since January.

Producer Prices Drop, Slowing Annual PPI

The depreciation of the dollar followed the release of the March U.S. producer prices index (PPI), which recorded a 0.5% decline from February, the largest monthly decrease since the onset of the pandemic. On a yearly basis, the PPI increased by 2.7%, the smallest gain in over two years. Meanwhile, the core PPI, which excludes volatile food and energy components, fell 0.1% from the previous month and rose 3.4% compared to a year ago.

Consumer Prices Report Smallest Increase Since May 2021

The PPI figures were released a day after consumer prices registered the smallest annual increase since May 2021. Despite expectations for the Federal Reserve to raise interest rates once more next month, most likely by 25 basis points, there is growing speculation that the U.S. central bank will begin cutting rates before the end of the year.

Analysts Predict Fed Easing Cycle and Dollar Weakness

Investors are looking forward to the upcoming Fed easing cycle and are confident that the dollar will weaken, presenting investment opportunities. More economic data is expected on Friday, with the March retail sales release taking centre stage. The report is anticipated to reveal a 0.4% monthly contraction, identical to the previous month, as inflation continues to erode consumer purchasing power.

EUR/USD Reaches One-Year High as ECB Expected to Continue Rate Hikes

The EUR/USD pair climbed 0.2% to 1.1069, hitting a fresh one-year high, following data released on Thursday which indicated persistently high German consumer prices. This development suggests that the European Central Bank (ECB) will maintain its interest rate hikes longer than its U.S. counterpart. ECB Governing Council member Pierre Wunsch stated that the market's expectation of a further 75 basis point increase is reasonable, but dismissed predictions of a rate cut around the year's end.

GBP/USD Rises to 10-Month High as BoE Expected to Raise Rates

The GBP/USD pair advanced 0.1% to 1.2535, reaching a 10-month high, as the Bank of England (BoE) is anticipated to hike rates in May, with U.K. inflation remaining in double digits after a surprising acceleration to 10.4% in February. ING analysts noted that the soft dollar narrative is pushing GBP/USD towards the 1.2650/2750 range, driven primarily by the dollar's weakness.

AUD/USD Steady, but Anticipated RBA Rate Hike Boosts Aussie Dollar

The AUD/USD pair remained relatively unchanged at 0.6782, but the Aussie dollar is poised for a 1.7% surge this week, spurred by a much stronger-than-expected employment report. This development has fueled increased bets on the Reserve Bank of Australia (RBA) raising interest rates higher.