US Dollar Holds Steady as Softer Inflation Slows Rate Hike Expectations
Market Reaction to US Inflation Data
By Chibuike Oguh
Dollar Movement and Treasury Yields
NEW YORK, Sept 30 (Reuters) - The dollar was flat against major currencies on Wednesday following a smaller-than-expected increase in US inflation, which reduced market bets on an interest rate hike from the Federal Reserve.
The dollar has been strengthening in tandem with rising US Treasury yields on growing expectations of more Fed rate hikes amid inflation driven by higher oil prices. The greenback is still on track for monthly gains against the euro, Swiss franc and the pound sterling.
Short-Term Yield Fluctuations
But the dollar pared some of those gains following the data before recovering as US Treasury yields fell initially across the board. The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last down 0.4 basis points at 4.885%.
Performance of Major Currencies
The euro was flat at $1.133050. The single currency is still headed for a monthly loss against the dollar after two consecutive months of gains.
Expert Insights on Market Drivers
"We can't tell if the revised PCE data by itself or if other factors were responsible for a softer-than-expected print, which initially caused bonds to rally and yields to come down and the dollar to weaken," said John Velis, FX and macro strategist at BNY.
"We had some strong GDP data: the long end of the yield curve has kind of gone back up and front end is still lower so the curve is steeper. So the 2-year yield has come down to reflect lower expectations of an October rate hike and the dollar has come down in tandem."
Inflation Data and Fed Expectations
US Commerce Department data showed that the Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, rose 0.3% last month. Economists polled by Reuters had forecast an increase of 0.4%.
Market Probability of Rate Hikes
Traders are now pricing a 37% probability of a Fed rate hike in October, down from 70% a week ago, according to the CME's FedWatch tool.
Strategist Commentary
"Today's softer PCE report, following (Federal Reserve Bank of New York President John) Williams' pushback against the urgency of another hike, has prompted a meaningful reduction in expectations for consecutive Fed rate increases," said Joel Kruger, markets strategist at LMAX Group.
"That repricing is pulling Treasury yields lower and narrowing the dollar's yield advantage, giving the latest wave of dollar selling a clear fundamental catalyst."
Oil Prices and Broader Market Impact
Oil prices rose and were on track for a big monthly gain in September as US-Iran talks aimed at ending the war stalled. The Brent November futures contract, which expires on Wednesday, rose 0.92% to settle at $103.53 a barrel.
Currency Performance Overview
The dollar was also flat at 157.34 against the yen. It was up 0.26% at 0.83575 versus the Swiss franc and on track for the second straight month of gains.
Sterling strengthened 0.26% to $1.3265 but was set for a monthly loss against the dollar, ending two consecutive months of gains.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was flat at 101.47. It is still headed for a monthly gain in September, snapping two straight months of losses.
Other Major Currencies
Elsewhere, the Australian dollar weakened 0.57% versus the greenback to $0.6948, and the kiwi weakened 0.09% versus the greenback to $0.5635.
(Reporting by Chibuike Oguh in New York; Editing by Mark Potter, Emelia Sithole-Matarise and Andrea Ricci )
