Dollar Eases as Oil Prices Retreat, Fed Minutes Show Divided Rate Outlook

The U.S. dollar weakened on Thursday, pressured by a retreat in oil prices and Federal Reserve meeting minutes that indicated a split among policymakers on the future path of interest rates. The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, slipped to 100.96 in late afternoon trading.

Fed Minutes Reveal Divided Outlook

Minutes from the Federal Open Market Committee’s (FOMC) June 16-17 meeting showed a complex and divided debate over monetary policy. While the committee ultimately held its key policy rate steady, the minutes noted that "a few participants" believed there was a case for an immediate rate hike.

The discussion highlighted competing risks. According to the minutes, "most" participants saw scenarios where inflation would cool toward the Fed's 2% target on its own. However, "most" also acknowledged that inflation could remain elevated due to factors like strong AI-related demand, the conflict in the Middle East, or tariffs.

"The minutes to the June 16-17 FOMC meeting were hawkish, but not surprisingly so considering the dot plot released three weeks ago," said Michael Feroli, chief U.S. economist at JPMorgan, in a note on Wednesday.

Oil Prices Swing on Geopolitical News

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A key driver for both inflation expectations and currency markets has been the volatility in crude oil. Prices fell on Thursday after President Donald Trump stated that Iran wanted to make a deal "so badly," easing fears of a wider conflict that had pushed prices to three-week highs earlier in the week. The comments came after the U.S. launched retaliatory strikes against approximately 170 targets in Iran following attacks on commercial oil tankers.

Market strategists noted the close link between energy costs and Fed policy. "If oil prices do not rise further between now and next week, the Fed’s Kevin Warsh will be able to dial back the Fed’s hawkish tone," commented Thierry Wizman, global FX and rates strategist at Macquarie. He added that the price of oil could determine whether the next rate hike occurs in September or October.

Other Major Currencies

• Chinese Yuan (CNY): The yuan firmed against the dollar, with the USD/CNY pair falling to 6.7921. The move came after mixed inflation data showed China's producer price index (PPI) rising 4.1% year-over-year in June, its fastest pace since July 2022, while consumer price inflation (CPI) moderated to 1.0%.
• Japanese Yen (JPY): The yen posted a rare gain, with the USD/JPY pair dipping to 162.40. Despite the daily strength, the yen remains near a 40-year low against the dollar, a level that has previously prompted intervention from Japanese authorities.