U.S. dollar strengthens as hot producer inflation data keeps rate hikes in play

The U.S. dollar firmed on Wednesday, as yet more hotter-than-expected inflation data kept expectations of interest rate hikes later this year in play. Investors were also eyeing President Donald Trump’s high-stakes trip to China for any traction on the Iran war after a protracted impasse between Washington and Tehran.

At 16:50 ET (20:50 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, rose 0.2% to 98.49.

April producer inflation posts largest monthly gain since 2022

The focus on Wednesday was on the April producer price index (PPI) report a day after the release of April consumer price index (CPI) data.

According to the Bureau of Labor Statistics, U.S. headline PPI in April ticked up 1.4% M/M, the largest monthly advance since March 2022. On a Y/Y basis, headline PPI jumped 6%, the biggest since December 2022. Analysts and economists had predicted a climb of 0.5% M/M and 4.9% Y/Y.

The PPI data follows a similarly hot CPI print, which showed a big impact of surging oil prices due to the Middle East conflict. The PPI readings hinted that the spike in oil was raising production costs as well.

With U.S. inflation clearly being affected by the oil shock emanating from the Iran war, the Federal Reserve is likely to keep interest rates on hold. Following the PPI readings, expectations of potential rate hikes later this year were maintained, as per the CME FedWatch tool.

The data comes at a time of transition for the Fed, with incumbent chair Jerome Powell set to end his term on Friday. He will be replaced by Trump’s pick Kevin Warsh, who on Wednesday was confirmed by the U.S. Senate as the next Fed chief.

"With the services aspect of the PPI expanding faster than core goods, the risk of inflation spreading across the entire economy is elevated. Granted, the oil shock is a one-time event, but once firms raise their selling prices, the increases tend to be stickier and are unlikely to be reversed by subsequent declines in crude oil prices," José Torres, senior economist at Interactive Brokers, said.

"The 2022 crisis offers significant lessons related to spikes in gasoline prices. As the effects of pain at the pump have broadened to goods, especially services, the Fed has been unable to steer the nation towards its 2% objective since 2021. The amplification of price pressures leads firms to focus on margin expansion after input costs fall, and that’s a real concern for inflation expectations," Torres added.

Attention on Trump’s China trip

Away from the economic calendar, the U.S. and Iran remain at an impasse after Trump earlier this week said a ceasefire between the warring parties was on “life support” following his rejection of Tehran’s response to a U.S.-backed proposal aimed at ending the conflict and reopening the Strait of Hormuz.

The focus is now on Trump’s summit this week with counterpart Xi Jinping in China, where the two leaders are expected to discuss trade tensions, the Iran conflict, Taiwan, and global supply chains. Trump landed in Beijing on Wednesday to a red carpet greeting. The president will participate in an official state arrival ceremony on Thursday, after which he will meet with Xi and sit for multiple interviews.