Dollar Retreats as Crude Oil Slump Eases Inflation Pressure

The US dollar index fell by 0.11 per cent as a sharp decline in crude oil prices dampened inflation expectations and eased pressure on the Federal Reserve to maintain restrictive monetary policy. The dollar index, which measures the greenback against a basket of major currencies, faced additional headwinds from a rally in the Chinese yuan to a 3.25-year high. Despite the initial weakness, the dollar recovered from its lowest point after the Richmond Fed’s May manufacturing survey of current conditions rose to a 4.5-year high of 13, significantly beating expectations of four.

Conversely, the euro rose 0.15 per cent to a one-week high, bolstered by hawkish rhetoric from the European Central Bank. ECB Governing Council member Yannis Stournaras stated that the likeliest outcome is an interest rate hike in June, citing prolonged energy price rises due to the conflict in the Middle East. The drop in crude oil prices, which fell four per cent to a five-week low, also provided a tailwind for the Eurozone economy, given that Europe imports the majority of its energy. However, gains were partially capped by German economic advisers to Chancellor Merz, who cut their 2026 GDP forecast for Germany to 0.5 per cent from a previous estimate of 0.9 per cent.

In the yen pair, the Japanese currency weakened to a 3.5-week low against the dollar after data showed Japan’s April PPI service prices rose less than expected. Service prices eased to a 3.0 per cent year-on-year increase from 3.3 per cent in March, missing the expected 3.3 per cent rise. Losses for the yen were mitigated by lower US Treasury yields and falling oil prices, which benefit Japan’s energy-importing economy. Markets are currently discounting a 76 per cent chance of a 25 basis point rate hike by the Bank of Japan at its June 16 meeting.

Precious metals declined, with June COMEX gold dropping 1.19 per cent to a 1.75-month low and July COMEX silver falling 1.78 per cent. The broader stock market rally dampened safe-haven demand for bullion, while hawkish central bank comments weighed on prices. Despite this, supportive factors included strong purchases by the People’s Bank of China, which added 260,000 ounces to its reserves in April, marking the largest monthly increase in a year.

Swaps markets are pricing in a 2 per cent chance of a 25 basis point Fed rate cut at the June 16-17 meeting, while assigning a 95 per cent probability to a 25 basis point ECB rate hike at its June 11 meeting. In the equity markets, US stocks showed mixed performance, with energy-intensive sectors such as airlines and cruise lines rising on the back of lower bond yields and oil prices.