Dollar Reclaims Ground as Trump Calms Trade Tensions, CPI Data Meets Expectations

This Tuesday session was the mirror image of Monday on the forex market, with a dollar index that erased the 0.3% gained the day before, slipping back to 100.90—a level that has served as support since July 2. After Monday’s verbal escalation, Trump, as he has done 41 times since early April, changed course and delivered more soothing remarks. The euro took advantage, rebounding +0.4 to +0.45% to around 1.1425, while the Swiss franc (+0.65%) erased the previous day’s losses at 0.8090/USD and gained 0.3% against the EUR at 0.9245.

Also worth noting was the solid performance of the Canadian dollar (+0.6%) and the Australian dollar (+0.85%), while the yen fell against all currencies, except versus the greenback (+0.15% to 162.15.

Trump announced around 6:30 p.m. that he is converting the 20% tax on the value of cargo on ships transiting through Hormuz into an obligation to finalize purchase and investment projects with the Persian Gulf countries (except Iran, of course). Trump had earlier downplayed the seriousness of the reciprocal bombings and attacks between the United States and Iran, calling them ‘incidents’ that do not foreshadow an escalation. He also confirmed that the Strait of Hormuz was under American control… but the reality is that even with this protection announced last weekend, virtually no ships are sailing.

These announcements are not really convincing bond markets, while Wall Street, as usual, seizes on the slightest ‘positive’ presidential statement to push decisively higher (+1% for the Nasdaq, +0.4% for the S&P 500).

The day was also marked by Kevin Warsh’s first appearance before a congressional committee: this was the famous semiannual ‘testimony’, and he used it to announce that the Fed is entering a ‘new era.’
There is no question of allowing inflation to get ahead of monetary authorities (a shot across Jerome Powell’s bow), as investment, notably in A.I., is accelerating sharply.
The labor market remains ‘remarkably resilient’ and financial markets seem to be in robust health… but Kevin Warsh would like growth to rest on a ‘broader base’ and for prices to cool.

On that front, the Labor Department reported that the consumer price index (CPI) contracted by 0.4% last month, after a 0.5% rise in May, while economists had been looking for only a 0.1% decline.
Over one year, that brings CPI’s deceleration to 3.5% after +4.2% the prior month, versus a consensus of +3.8%.

The sharp drop in oil prices, tied to expectations of a reopening of Hormuz (an Islamabad agreement struck a month ago, never honored and now moribund after the recent ‘incidents’), is a major factor.
Core CPI (core), which excludes volatile components like oil and food, came in unchanged, whereas it had been expected to rise by 0.2%.
On an annual basis, it is running at 2.6%, again below the market’s average estimate (+2.8%).
That does not materially change expectations for Fed rate hikes: +25 bps for 63% of respondents by mid-September, and a second tightening is priced at a 45% probability by mid-December (45% are betting on no change, 10% have no opinion).

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