MUFG’s Lee Hardman notes that the US Dollar has weakened, with the US Dollar Index (DXY) moving back towards 100.00 as softer June CPI and PPI data point to a lower monthly core PCE reading and reduced pressure on the Federal Reserve to tighten policy. While Fed Chair Kevin Warsh played down the lasting inflationary impact of AI investment, Governor Lisa Cook maintained a cautious stance and warned that she was prepared to act if disinflation failed to resume.

Weaker data eases Fed tightening risk

"The US dollar has continued to trade at weaker levels overnight with the dollar index moving back closer to the 100.00-level."

"Taken together the CPI and PPI readings have indicated that the Fed’s preferred measure of underlying inflation pressure, the core PCE deflator, is likely to increase by around 0.2% in June helping to lower the annual rate to 3.3%."

"Overall, the US inflation data released this week supports our view that the Fed is likely to leave rates on hold this year contributing to a re-weakening of the US dollar."

"Our forecast for the Fed to leave rates on hold was also supported by some dovish comments yesterday from Fed Chair Kevin Warsh when speaking about the near-term inflationary impact from surge in capital investment related to AI."

"He told lawmakers that “I don’t view a one-time change in prices as necessarily being inflationary because I think there’s a supply response. In that way, this is different from a foreign conflict and what it might do, which tends to reduce the supply side of the economy”."

"At the same time, comments overnight from Fed Governor Lisa Cook continued to highlight the Fed is still seriously considering rates this year. She stated that “if we do not see signs of disinflation soon, I am prepared to act”. But she is not in a rush to raise rates as she added that the “FOMC can take its time, I can take my time to observe more data to understand whether it’s really restrictive or not”."

"In the medium-to-long run he remain optimistic that AI will deliver a positive supply shock to the US economy and prove disinflationary."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)