The dollar fell against the euro on Tuesday, but remained near its highest level in over two years, as inflation data failed to provide a clear indication of when the US Federal Reserve will cut interest rates. The producer price index (PPI) in December was cooler than expected, but the dollar did not experience a significant reaction. Investors are now pricing in a first rate cut in September, but less than the 50 basis points projected by the Fed in December.
The threat of tariffs and fewer rate cuts priced in have lifted Treasury yields and supported the greenback. However, a new report suggesting the US could take a measured approach to tariffs has raised concerns about the potential impact on inflation. President-elect Donald Trump’s policies are expected to boost growth and price pressures, and his Treasury pick, Scott Bessent, is expected to keep a leash on US deficits and use tariffs as a negotiating tool.
The dollar index, which measures the US currency against six other units, slipped 0.04% to 109.37, shy of the 26-month high of 110.17 reached on Monday. The euro was up 0.39% at $1.0286, while the British pound was down 0.07% at $1.2194 against the dollar.
The dollar rose 0.37% against the yen to 158.055, ahead of next week’s Bank of Japan policy meeting, where markets are pricing in a 57% chance of a rate hike. The yuan was flat, changing hands at 7.3468 per dollar, as the People’s Bank of China (PBOC) continues to support its weak currency.