The U.S. dollar weakened for a third consecutive month in July, shrugging off fears over the escalating war in Iran and warnings of a potential bubble in leading artificial intelligence companies.
Globally, the dollar fell 1% over the month. In Peru, the exchange rate slipped from 3.409 soles to 3.399 soles per dollar.
The Federal Reserve held its benchmark interest rate steady and signaled it would wait for more information before raising borrowing costs, even as it reaffirmed its commitment to keeping inflation at target. The decision, alongside the release of the personal consumption expenditures price index on Thursday, reduced market expectations for a near-term U.S. rate hike, weighing on the dollar and lifting risk assets.
Credibility concerns
Félix Olivares, executive director and sales and trading head at BTG Pactual Peru, said a growing perception that the United States is losing credibility is also pressuring the currency. He said the concern stems not from economic data, which remains solid, but from how the current administration has handled several overlapping issues, including the management of the Iran war and the disclosure of a fund that benefits President Donald Trump while he is in office.
Olivares added that markets do not expect the U.S. government to raise interest rates, and said that outcome is unlikely in the near term as long as the oil price increase driven by the war remains a supply shock and does not feed broader inflation expectations. He said all of these factors point toward further dollar weakness.
Peru floor in sight
At the local level, Olivares said the dollar in Peru should already be trading below current levels, but interventions by the Central Reserve Bank of Peru are preventing it from falling below 3.38 soles. He noted that the market has learned to respect the central bank and is unlikely to challenge it.
For August, he estimated the dollar in Peru would tend toward a range of 3.36 to 3.40 soles, or possibly lower if the central bank steps back from the foreign exchange market. If the dollar reaches the bottom of that range, he said it would mark its lowest point of the year.
