Dollar Dips as Consumer Spending and Inflation Disappoint

The U.S. dollar weakened on Friday after a report showed that consumer spending, the main driver of the economy, barely rose in May while inflation moderated slightly.

According to the Commerce Department, personal consumption expenditures (PCE) edged up by 0.1% month-over-month in May, missing the consensus estimate of 0.2%. On a year-over-year basis, PCE increased by 3.8%, down from 4.0% in April.

source: tradingeconomics.com

Personal income, on the other hand, rose by 0.4% month-over-month in May, beating the forecast of 0.3% and reversing a 0.3% decline in April. The increase in income was mainly driven by higher wages and salaries as the labor market continued to recover.

The report also showed that the PCE price index, the Fed’s preferred measure of inflation, rose by 0.3% month-over-month in May, matching market expectations. However, on an annual basis, the core PCE index, which excludes food and energy prices, eased to 3.6% from 3.7%, slightly below the forecast of 3.7%.

Dollar Falls Below 103, Ending Two-Day Bullish Streak

The softer-than-expected consumer spending and inflation data may give the Fed some breathing room to maintain its accommodative stance and avoid a premature tapering of its bond-buying program. While the central bank may still hike interest rates by 25 basis points in July, as signaled by its latest dot plot, a September hike may be off the table for now. That said, the situation could limit Treasury yields in the near-to-medium term, creating the perfect combination for a dollar pullback.

The dollar, as measured by the DXY index, fell by 0.5% to 103.75 after the release of the report, while Treasury yields also retreated across the board. The greenback may face further downside pressure if upcoming data confirms that the U.S. economy is cooling off from its post-pandemic boom.