The US dollar index dropped slightly on Tuesday as investors focused on the US-China trade war and economic data for signals of growth and whether the US Federal Reserve is likely to cut rates in the coming months. Risk sentiment improved on Monday, after the United States reached a deal with Mexico on Friday to avoid imposing tariffs on the country.
Ongoing tensions between the US and China and the prospect that US President Donald Trump will look to impose tariffs on Japan and Europe, however, continues to weigh on risk sentiment. Investors are concerned that trade wars are harming global growth, and increasing the likelihood that the US central bank will need to cut rates to stimulate growth.
Data on Tuesday showed that US producer prices rose for a second straight month in May, though price pressures remained tepid. "It certainly plays into the dovish Fed story," said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.
Consumer Price Index data on Wednesday, which is closely watched by the Federal Reserve, is the next inflation indicator. Retail sales on Friday will also be closely watched for indications on whether tariffs are slowing the economy.
"We know we are in a low inflation environment right now, but the question is what is the US story in terms of growth," said Thin.
This month's G20 summit will help push US-China trade talks forward but no final agreement was expected to be reached there, US Commerce Secretary Wilbur Ross said on Tuesday.
Trump on Monday said he was ready to impose another round of punitive tariffs on Chinese imports if he cannot make progress in trade talks. He added on Tuesday that Beijing needed to reverse its decision to reject some of the previously negotiated steps on trade.
Trump also accused Europe of devaluing the euro zone's single currency in a series of tweets that also targeted US monetary policy with renewed attacks on the US central bank.
"The Euro and other currencies are devalued against the dollar, putting the US at a big disadvantage," Trump tweeted without offering any evidence. He also slammed US interest rates for being too high.
Interest rate futures traders are pricing in an almost 80 percent chance of a rate decrease at the Fed's July meeting, according to the CME Group's FedWatch Tool.