- The US Dollar Index edged lower on Monday, cooling after a huge rally for the greenback.
- The dip comes as markets soften rate hike expectations, seeing a 100 basis point jump this month as less likely.
- The ECB's next rate hike could lead to further softening of the greenback, according to an analyst.
The dollar slipped on Monday, with the US Dollar Index edging lower on expectations that the Federal Reserve's next interest rate increase will be less than market had been expecting following the release of June's inflation data.
The Dollar Index, which measures the value of the greenback against a basket of currencies, has surged this year two two-decade highs this year.
That trend has slowed as investors dial back their expectations of another rate hike, which also lowers lowered yield expectations for the dollar. Some easing recession fears and a return of risk appetite among some investors has also dented demand for dollars.
The Dollar Index fell to $107.28 from Friday's close of $108.06, as traders begin to price expectations for a 75-point rate hike instead of 100 basis points, according to Reuters. The expectation of a larger rate hike this month came on the heels of June's Consumer Price Index reading, which showed prices increased in June by 9.1%.
Fed Funds futures on Monday were pricing in about a 70% chance the Federal Reserve hike rates by 75 basis points next week, after pricing in a nearly 80% chance that the central bank would go for 100 basis points at the end of last week.
Some Fed officials have already given their support of a 75-point hike ahead of the central bank's July meeting, as there are signs inflation has peaked and that lagging data points will soon begin to show prices cooling. According to Fed Governor Christopher Waller, markets "got ahead of themselves" by pricing in a full-point rate hike, noting that the central bank needed to be wary of overtightening due to new data in the retail and housing sectors.
Today, the National Association of Home Builders reported builder sentiment dropped from 67 to 55 in July, indicating the housing market is well on its way to cooling off. Meanwhile, the University of Michigan Consumer Sentiment survey rose by 1.1 points last week from June's record-low and showed that consumers' expectations for inflation are beginning to come down.
But there's more to come that could further halt the dollar's rise. According to OANDA analyst Edward Moya in a note on Monday, the European Central Bank is also expected to issue a rate hike at their next meeting on July 21, which could possibly weaken the dollar further and strengthen the euro.