Dollar Steady Ahead of US Inflation Data

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Dollar Steady Ahead of US Inflation Data

The dollar weakened and government bond yields fell to multi-week lows on Friday after a benign reading of USA inflation in June and soft retail demand raised doubts the Federal Reserve would increase interest rates later this year.

Reaction was largely muted to a story by Politico that Trump is increasingly unlikely to nominate Yellen next year for a second term, and National Economic Council Director Gary Cohn is the leading candidate to succeed her. Manufacturing output rose 0.2%.

The continued drop in sales surprised economists, who had expected sales to inch up by 0.1% compared to the 0.3% decrease originally reported for the previous month.

Even with a second day of testimony where Yellen may be asked to further explain a few of her comments from Wednesday, traders are already looking ahead to Thursday's USA producer inflation report and Friday's consumer inflation report. The market is being primarily supported by Yellen's remark that the central bank would only gradually tighten monetary policy, curbing speculation that interest rates would rise a few times this year.

In the 12 months through June, the CPI increased 1.6 per cent - the smallest gain since October 2016 - after rising 1.9 per cent in May.

Yellen said hitting 3 percent growth in the next five years "would be wonderful".

Economists had forecast the CPI edging up 0.1 per cent last month and climbing 1.7 per cent from a year ago.

Chandler said there's not much on the near-term horizon that will drive the dollar higher, but it could still adjust if the Fed raises interest rates at the end of the year.

The New Zealand dollar was trading at 73.16 USA cents as at 5 pm from 72.84 cents late yesterday but was weaker versus last Friday in NY when it traded at 73.80. Australia's S&P/ASX 200 rose 0.3 percent to 5,751.10.

On Wednesday and Thursday, Fed Chair Janet Yellen testified in front of Congress as part of the bank's twice-annual Humphrey-Hawkins testimony.

There were also decreases in airline fares and prices for apparel, household furnishings, new motor vehicles, and used cars and trucks.

Adding to the downward pressure on yields Friday was a report from the Commerce Department that retail sales fell 0.2% in June from the prior month. Elsewhere, consumer spending disappointed after a 0.2% drop in retail sales. It was the yield's largest weekly decline since the week ended June 2.

Excluding auto sales, retail sales still dipped by 0.2% in June following the 0.3 decline seen in May.

The Retails Sales month-on-month reading is slightly misleading given it mostly oscillates within a range because a sharp increase or decrease in sales is not usually sustainable over a long period.

Lower costs for gas, airline tickets, new and used cars and wireless mobile phone plans kept USA consumer prices flat in June, evidence that inflation remains muted.

Growth in the second quarter likely got a boost from the industrial sector of the economy. Its drop of 0.1 % in May and the lack of a rebound in June may trouble Fed officials.

Output at the nation's factories rebounded 0.2 per cent last month after falling 0.4 per cent in May.

This week's dynamic contrasts sharply with recent Fed commentary focusing, for instance, on elevated asset price valuations and the fact that financial conditions have actually loosened since the Fed started tightening in December 2015.

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