(July 31): The dollar headed for its worst week in three months on concerns the Federal Reserve won’t move forcefully enough to contain inflation. 

Bloomberg’s Dollar Spot Index is on course for a 1.2% slump in the past five days. While the gauge recovered some ground on Friday, it remains near the weakest level in over a month.

The greenback’s retreat despite higher US yields — which would typically support the currency — reflects angst over the Fed’s credibility. Chair Kevin Warsh is facing scrutiny after his messaging stoked worries that the central bank may hold off raising rates and allow inflation to remain above target. Long-dated Treasury yields are at their highest since 2007.

The simultaneous drop in Treasuries and the dollar “feels very ‘emerging market’,” said Randhir Prakash, managing director at Gavekal Wealth. Investors are starting to signal displeasure at the path of US policy, he said, which is “bearish for both Treasuries and the US dollar.”

Efforts by Japanese authorities to shore up the yen also added to pressure on the greenback. 

Intervention saw the Japanese currency surge as much as 3.3% versus the dollar in New York trading on Thursday, though it has since pared the advance after the Bank of Japan left interest rates unchanged on Friday.

Still, the Fed’s decision to hold rates rather than hike got some support from the latest economic data. Figures on Thursday showed US economic growth moderated in the second quarter, while the Fed’s preferred measure of inflation — the personal consumption expenditures price index — fell 0.1% last month.

The dollar ticked as much as 0.3% higher on Friday, buoyed by month-end flows, while yields on 10-year Treasuries fell two basis points to 4.65%. Swaps continued to price 34 basis points of US interest-rate hikes this year, little changed from Thursday.

“We remain reluctant to call the bottom in this dollar selloff just yet,” said Francesco Peosle, an FX strategist at ING. “Any disappointment in US data should lead to a larger dovish repricing than before.”

Uploaded by Evelyn Chan