Dollar slides to two-week low as tame inflation and falling yields shift sentiment

The dollar slid to its lowest point in two weeks on Wednesday, surrendering ground against the euro and British pound in a day of uneven trading. The retreat came after fresh economic data arrived showing that underlying inflation in the United States remained subdued, with core consumer prices unchanged for a second consecutive month. That benign reading shifted the calculus for traders betting on the currency's direction. If inflation stays tame, the Federal Reserve is unlikely to raise interest rates anytime soon, which means the dollar loses one of its chief attractions—the prospect of higher returns for investors holding dollar-denominated assets.

The dollar index, which measures the currency's strength against a basket of major peers, drifted down to 90.249, marking its third consecutive day of losses. It was last trading at 90.324, down 0.2% on the day. The 10-year Treasury yield, a barometer of where markets expect rates to head, fell 2 basis points to 1.136%. Erik Nelson, a macro strategist at Wells Fargo, captured the shift in momentum: the dollar's bullish case had weakened, he said, even if traders weren't ready to abandon the view entirely.

The broader context is a reversal from the dollar's strong start to 2021. For weeks, the greenback had benefited from expectations that the U.S. economy would recover faster than others, and that the Federal Reserve might eventually tighten monetary policy. But sentiment has tilted. Optimism about vaccines, corporate earnings, and government support has lifted appetite for riskier assets—stocks, emerging market currencies, cryptocurrencies—at the expense of the safe-haven dollar. Against the yen, the dollar gained slightly to 104.67, but the euro climbed to $1.2132 and sterling reached fresh three-year highs of $1.3865.

Cryptocurrencies reflected the same shift in risk appetite. Bitcoin, which had surged to $48,216 on Tuesday after Tesla announced a $1.5 billion investment in the digital asset, pulled back 3.7% to $44,799 on Wednesday. Ethereum, which often moves in lockstep with bitcoin, hit a record $1,839 before retreating to $1,706, down 3.8% on the day. Sweden's crown strengthened ahead of its central bank's interest rate decision, though it pared gains after the bank held policy steady as expected.

The real tension in currency markets now centers on President Joe Biden's proposed $1.9 trillion fiscal stimulus package. Traders are split on its implications. One camp sees it accelerating U.S. economic recovery, which would strengthen the dollar as foreign investors seek exposure to American growth. The other camp worries it could overheat the economy and push inflation higher, which would favor riskier assets and weaken the dollar's relative appeal. Last week's jobs data appears to have tipped the scales toward the latter view, according to analysts at Westpac. The question hanging over markets is which force will ultimately prevail—and for how long.