Dollar drops after inflation hits three-year high

The dollar index was 0.1% lower at 99.875, not far ⁠from the two-month high of 100.214 hit on Monday

The dollar dropped on Wednesday after data showed U.S. consumer inflation rose to its highest level in three years in May, doing little to raise the chances of a central bank rate hike this year.

U.S. consumer inflation rose at its fastest ‌pace in three years in May as the Iran war raised the price of gasoline and other energy products.

The Consumer Price Index rose 4.2% in the 12 months through May, the largest gain since April 2023, the Labor Department’s Bureau of Labor Statistics said on Wednesday.

Underlying inflation avoided a widely feared acceleration last ​month, suggesting that soaring energy prices are not yet feeding into the core measures targeted by the Federal Reserve, said Karl Schamotta, chief market strategist ​at Corpay in Toronto.

The dollar index was 0.1% lower at 99.875, not far ⁠from the two-month high of 100.214 hit on Monday.

Traders are positioning for a more neutral statement from officials at next week’s FOMC meeting, and are ​modestly lowering expectations for a rate hike by year-end, Schamotta said.

Traders of short-term U.S. interest rates edged away from bets that the central bank will deliver a rate hike ​as soon as September, but continued to show strong conviction that a rate hike would arrive by October.

After three months of elevated energy costs, meaningful pass-through to core goods has not materialized, Jason Pride, chief of investment strategy and research at wealth ​management firm Glenmede, said in a note. This represents the clearest data point in today’s report that the Iran shock, however large at the pump, has not metastasized ​into a generalized inflation episode.