On Wednesday, the Swiss franc (CHF) dropped against the US dollar (USD) amid renewed tensions between the US and Iran that bolstered demand for the dollar. At that moment, the USD/CHF was trading around 0.7991, close to a two-month peak.
US inflation picked up again in May, influenced by climbing oil prices that impacted consumer expenses. The annual inflation rate reached 4.2%, the highest since April 2023, although the monthly rate slightly decreased from 0.6% to 0.5%.
Even with the increase in overall inflation, core inflation only inched up to 2.9% from 2.8%, and the monthly figure slowed from 0.4% to 0.2%, falling short of expectations.
These numbers didn’t significantly alter forecasts regarding a potential interest rate hike by the Federal Reserve later this year. Yet, the modest rise in core inflation hinted that fundamental price pressures were quite restrained, which briefly held back the dollar until it regained strength as traders’ focus shifted back to Middle Eastern events.
US President Donald Trump reiterated his military threats against Iran following the downing of a US Apache helicopter in the Strait of Hormuz earlier that week. On Tuesday, the US executed retaliatory strikes on Iranian targets, and Iran responded with assaults on US military bases in the Gulf.
“We have every right” to renew assaults on Iran, Trump stated in a speech on Wednesday, adding, “We attacked Iran hard yesterday,” and warned, “We will attack it again today.” He also suggested potential strikes on Iranian power plants and bridges.
These comments contributed to a boost in the US dollar and oil prices. The US Dollar Index (DXY), which measures the dollar against six major currencies, dipped to 99.72 earlier in the day before climbing back to approximately 99.92.
Attention is now on Thursday’s upcoming release of the US Producer Price Index (PPI) report for further insight into the inflation landscape. Economists anticipate the headline PPI to rise from 6.0% to 6.4% year-on-year, with core PPI expected to increase from 5.2% to 5.4%.
Frequently asked questions about inflation
Inflation reflects the increase in prices for a standard collection of goods and services. Headline inflation is usually expressed as a percentage change on both a month-over-month (MoM) and year-over-year (YoY) basis. Core inflation, which excludes more fluctuating components like food and fuel, tends to be the focus for economists and is targeted by central banks aiming to maintain manageable inflation levels, typically around 2%.
The Consumer Price Index (CPI) tracks the price changes in a basket of goods and services over time, expressed as a percentage on a month-over-month (MoM) and year-over-year (YoY) basis. Core CPI, which excludes volatile food and fuel costs, serves as a target for central banks. A rise in core CPI over 2% often leads to increased interest rates, which in turn boosts currency values. Falling inflation typically results in the opposite effect.
It might seem counterintuitive, but a country with a high inflation rate often sees an appreciation in its currency value, while a low inflation rate can cause the opposite. This occurs because central banks generally raise interest rates to mitigate rising inflation, thus attracting global investors seeking favorable conditions.
Historically, investors looked to gold during periods of high inflation due to its ability to retain value. While gold is still viewed as a safe haven during extreme market fluctuations, this is not always the case. Rising inflation typically prompts central banks to increase interest rates, which alters the investment appeal of gold as a non-yielding asset. Conversely, lower inflation tends to support gold values, as it usually leads to decreased interest rates.
