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Could the US Dollar Slump Be Short Lived?

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US dollar lower after inflation report

The US dollar depreciated against its major trading-partner currencies after the Bureau of Labor Statistics reported on May 10 that US consumer prices grew 0.1% in April after falling 0.1% in March. The core consumer price index, which excludes volatile food and energy prices, rose 0.2%, marking a 2.1% year-over-year increase. The US dollar (UUP) fell after this report, as a slower rate of inflation (TIP) growth could mean a slower pace of rate hikes. In a developed economy, higher interest rates boost the currency. On May 10, the US dollar (USDU) index closed at 92.5. It appreciated by 0.84% in May and 2.0% in April.

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Why could this decline be temporary?

The depreciation of the US dollar (UDN) after the April inflation report could be temporary—the Fed is the only central bank on a tightening path, leaving little reason for further decline. The knee-jerk reaction to the inflation (VTIP) report could subside in a few days as dollar demand stays high, especially in emerging markets that are net oil importers.

The outlook for the US dollar

With the expectations for a June rate hike intact and no other central bank eager to increase interest rates, the odds of further US dollar appreciation are high. Crude oil prices could also accelerate US dollar appreciation by boosting US inflation and US dollar demand in oil-importing countries. Overall, the path for the US dollar looks steep and appears unlikely to change.

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