Dollar Weakens Against Real as Commodities Rally and US Inflation Data Impacts Markets

The US dollar experienced volatility on Wednesday, September 11, 2024, as commodity prices rebounded and US inflation data reinforced expectations of a Federal Reserve rate cut next week.

The greenback closed at R$5.6498 against the Brazilian real, down 0.10% for the day. This performance contrasted with trends seen elsewhere. The DXY index, which measures the dollar against a basket of major currencies, edged up 0.09%.

Domestically, new data from Brazil’s service sector increased the likelihood of a Selic rate hike at the next Central Bank meeting on September 17-18.

The Brazilian Institute of Geography and Statistics (IBGE) reported that service volume rose 1.2% in July compared to June, surpassing market expectations of a 0.1% decline.

Emerging markets, including Brazil, also benefited from recovering commodity prices. Iron ore and oil both gained over 1% on Wednesday, rebounding from recent losses driven by concerns over China’s economic outlook.

In the US, the Consumer Price Index (CPI) rose 0.2% in August, which is in line with expectations. Annual inflation stood at 2.5%, slightly below market projections.

However, core CPI, which excludes volatile food and energy prices, increased 0.3% monthly and 3.2% annually, exceeding forecasts.

Following the CPI release, traders increased bets on a 25 basis point Fed rate cut next week. The CME Group‘s FedWatch tool now shows an 85% probability of rates being lowered to 5.00-5.25%.

This is up from 66% the previous day. Lower US interest rates typically weaken the dollar, making it less attractive compared to higher-yielding currencies like the Brazilian real.

This dynamic continues to shape currency markets as investors navigate evolving economic conditions and central bank policies.

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