US PPI rises 1.1% in May, boosting dollar across major pairs

US producer prices rose more than expected in May, the fastest pace in over a year, sending the dollar higher against all major peers.

US producer prices climbed 1.1% in May, exceeding economist estimates and reinforcing expectations that the Federal Reserve will keep borrowing costs elevated, pushing the dollar to session highs across major currency pairs.

"The PPI print confirms that upstream price pressures remain stubborn, driven largely by surging energy costs tied to the Iran oil shock," said Sarah Chen, senior currency strategist at Barclays. "This keeps the Fed on hold and supports the dollar's yield advantage."

The dollar strengthened against all Group-of-10 peers, with EUR/USD falling to session lows and GBP/USD extending its decline. USD/JPY climbed as the yield differential between US and Japanese government bonds widened, while USD/CAD rose as higher energy costs failed to offset the greenback's broad-based rally. The Bloomberg Dollar Index advanced 0.4% on the session, its largest single-day gain in three weeks.

The data raises the stakes for the Fed's next policy meeting on July 29-30, with swap markets now pricing a lower probability of rate cuts this year. Fed funds futures show traders assigning a 35% chance of a quarter-point reduction by September, down from 48% before the PPI release. If the consumer price index, due next Wednesday, confirms the same trend, the dollar could extend its gains as traders push back expectations for monetary easing further into 2026.

The May PPI reading marks an acceleration from April, when wholesale prices rose 0.5%. Energy costs accounted for a significant portion of the increase, with the index for final demand energy goods jumping 4.2% as crude oil prices climbed on supply disruptions tied to the Iran situation. Food prices rose 0.8%, also contributing to the upside, according to the Labor Department's report. Core PPI, which excludes food and energy, rose 0.3% in May, also above expectations.

The dollar's rally was broad-based, with the greenback gaining ground against both developed and emerging market currencies. The euro fell below the $1.08 level for the first time in two weeks, while sterling slipped as traders weighed the implications of divergent monetary policy paths between the Fed and the Bank of England. Against the yen, the dollar pushed toward the 158 mark, a level that has previously drawn intervention warnings from Japanese officials. USD/CAD rose 0.3% to C$1.3750, as higher energy costs failed to provide sustained support for the commodity-linked loonie.

For the Fed, the PPI data complicates the policy outlook. Chair Jerome Powell and his colleagues have repeatedly emphasized the need for greater confidence that inflation is moving sustainably toward the 2% target before cutting rates. The May producer price report suggests that confidence may take longer to build, particularly if energy costs continue to feed through to consumer prices. The 10-year Treasury yield rose 6 basis points to 4.52% after the data, reflecting the repricing of rate expectations, while the 2-year yield, more sensitive to monetary policy, climbed 8 basis points to 4.78%.

The last time producer prices rose this sharply was in early 2025, when supply chain disruptions following a separate geopolitical shock pushed the index up 1.3% in a single month. On that occasion, the dollar rallied for three consecutive weeks before the Fed signaled patience on rate cuts, a pattern that currency strategists say could repeat. The parallel is notable because energy prices were again the primary driver in both episodes, suggesting the transmission mechanism from supply shocks to currency markets remains intact.

For currency markets, the key question is whether the dollar's strength can be sustained. The greenback has already gained 4.5% this year against a basket of major currencies, driven by the Fed's higher-for-longer stance and the relative resilience of the US economy. A sustained break above 158 in USD/JPY could trigger verbal intervention from Tokyo, while EUR/USD below $1.07 would mark a new low for the year, potentially drawing attention from European policymakers.

This article is for informational purposes only and does not constitute investment advice.