Dollar Stabilizes as Fed Rate Cut Bets Rise on Soft U.S. Inflation

The U.S. dollar steadied on Wednesday after posting its sharpest drop in over three weeks, driven by weaker-than-expected inflation data and easing global trade tensions. The consumer price index (CPI) rose just 0.2% in April, under the 0.3% forecast, reinforcing market expectations of Federal Reserve rate cuts later this year. March CPI had slipped 0.1%, and while inflation is expected to rise due to new tariffs, recent trade developments have slightly improved the outlook.

President Donald Trump recently hinted at "potential deals" with India, Japan, and South Korea, following a 90-day trade truce with China and an agreement with the UK. These developments eased recession fears that had been fueled by Trump’s earlier tariff hikes, which sent the dollar index to a one-month high on Monday before Tuesday’s 0.8% decline.

The dollar index hovered at 100.94 early Wednesday, while the greenback held steady at 147.45 yen. The euro stood at $1.1188 and the pound at $1.3311. Against the Swiss franc, the dollar was flat at 0.8390, and in offshore trading, it held at 7.1928 yuan after dipping to a six-month low.

Despite the dip, analysts at Commonwealth Bank of Australia expect a 2–3% rebound in the dollar index in the coming weeks, citing improved trade sentiment. However, they don’t foresee a full recovery to the year’s starting levels near 108.50, noting that unpredictable U.S. policies have damaged the dollar’s safe-haven appeal.

Data from Bank of America’s latest fund manager survey showed global investors held their biggest underweight in the dollar in 19 years. Markets are pricing in about 50 basis points in Fed rate cuts by year-end, with the next expected in September.