New York Forex: Dollar Falls Over 1% in July, Fed and Inflation Data Send Mixed Signals, Yen Strengthens for Two Consecutive Days

The US dollar fell on Friday (July 31), declining over 1% in July—the worst monthly performance since April. Most of the dollar’s losses occurred after the Federal Reserve (Fed) interest rate decision, as foreign exchange markets began questioning the Fed’s ability to effectively curb inflation. These concerns were also reflected in the recent heavy selling of US Treasury bonds and a sharp rise in yields.

Meanwhile, the Japanese yen strengthened for the second consecutive trading day. Markets continue to speculate that the Japanese government intervened again to support the yen, helping it rebound from a 40-year low against the US dollar. This intervention expectation overshadowed the Bank of Japan’s (BoJ) decision to keep interest rates unchanged as expected.

At the close in New York, the dollar index (DXY), which tracks the dollar against six major currencies, stood at 99.83, down 1.3% for July.

US inflation data released in July, reflecting June price trends—including the Consumer Price Index (CPI), Producer Price Index (PPI), and the Fed’s preferred Personal Consumption Expenditures (PCE) index—came in below market expectations.

However, this inflation slowdown was largely driven by falling global oil prices in June. As Middle East diplomatic tensions worsened, oil prices rose again in July, causing a significant shift in market inflation outlooks ahead of the Fed’s Wednesday rate decision.

Although markets widely expected the Federal Open Market Committee (FOMC) to hold rates steady, the recent surge in oil prices pushed rate hike expectations higher than in recent years. Ultimately, the FOMC decided to keep the federal funds rate unchanged, but three officials voted against, advocating for a 25-basis-point hike.

Markets had hoped Fed Chair Kevin Warsh would provide clearer anti-inflation strategies or future policy guidance during the press conference, but no clear direction was offered.

US Treasury yields more directly reflected market unease, rising sharply in July and effectively acting like a rate hike.

On Friday, the three dissenting officials issued statements elaborating their support for a rate hike, with persistently high inflation being a common key factor. José Torres, Senior Economist at Interactive Brokers, said, "If the Fed still doesn’t hike at the next meeting, the recent dissatisfaction in the fixed-income market could worsen further."

He noted that the "bond market vigilantes" are confused by Warsh, who was once seen as one of the most hawkish members but has now shifted toward the center of the committee.

"This was evident in Wednesday’s meeting. Three officials voted for a hike, but Warsh seemed to want to delay further, while emphasizing that the previous Fed allowed inflation to stay above target for too long," he said.

He further added, "The US Treasury market is loudly telling the Fed that it can’t have it both ways. If there’s no hike in September, the long-end bond market will face even more severe consequences."

Euro Up 1% in July

The euro rose 0.1% against the dollar to 1.1537, gaining about 1% in July.

Earlier data showed Eurozone inflation rose from 2.8% in June to 2.9% in July, driven by rebounding oil prices. Core inflation, excluding food and energy, rose to 2.5%. Services inflation climbed to 3.3%.

Coupled with better-than-expected second-quarter GDP growth in the Eurozone, markets are increasingly confident that the European Central Bank (ECB) may raise rates in September.

Financial markets currently expect the ECB to cumulatively hike rates by more than 50 basis points by early next year, though economists warn that cooling labor markets and slowing food inflation could limit the central bank’s ability to make further large hikes.

Yen Strengthens for Two Consecutive Days

The yen rose again on Friday after a strong gain on Wednesday, with the dollar-yen pair posting its worst weekly performance since early August 2024.

The Nikkei Asia reported that the Japanese government indeed stepped in the previous day to buy yen and sell dollars.

Additionally, market participants noted that US authorities had also conducted exchange rate inquiries, often seen as a precursor to official intervention.

The Bank of Japan earlier voted 8-to-1 to keep the overnight call rate at 1.0%. The sole dissenting vote came from board member Hajime Takata, who advocated for another 25-basis-point hike following June’s increase.

The Bank of Japan also lowered its core CPI inflation forecast and slightly raised its GDP growth projection for the year. The central bank stated that government policy support would help sustain economic growth while helping to contain price pressures.

The British pound rose 0.1% against the dollar to 1.3484, gaining 1.7% in July.

As of approximately 6:00 a.m. Taiwan time on Saturday (August 1):

Dollar Index: 99.7904 (-0.19060%)

Euro to Dollar (EUR/USD): 1 EUR = 1.1529 USD (+0.0087%)

Pound to Dollar (GBP/USD): 1 GBP = 1.3482 USD (+0.1337%)

Australian Dollar to Dollar (AUD/USD): 1 AUD = 0.7025 USD (-0.0569%)

Dollar to Canadian (USD/CAD): 1 USD = 1.4011 CAD (+0.0071%)

Dollar to Yen (USD/JPY): 1 USD = 157.4100 JPY (-1.3289%)