US Dollar Strengthens After CPI Data; Yen Slips as Rate Hike Bets Fade
Market Reactions to US Inflation and Central Bank Expectations
By Karen Brettell
US CPI Data and Dollar Movement
Aug 12 (Reuters) - The dollar gained on Wednesday after U.S. consumer price inflation matched economists' expectations in July, even as traders pushed back expectations on when the Federal Reserve is likely to hike rates.
In the 12 months through July, the CPI advanced 3.4% after rising 3.5% in June. Core CPI increased 2.5% in the 12 months through July after climbing 2.6% in June.
Rate Hike Bets and Fed Policy Outlook
Traders have trimmed bets on a rate increase at the Federal Reserve's September 15-16 meeting since Friday's jobs report showed employers unexpectedly shed jobs in July. Fed funds futures traders are now pricing in 40% odds of a September rate hike, down from 44% before Wednesday's data and from 55% a week ago.
“I thought that after the soft jobs data on Friday, that the dollar would stay soft because of the expectations of the soft CPI. The dollar really didn't go anywhere. If anything, it was a bit firmer than I expected,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Impact of Oil Prices and Geopolitical Events
The greenback has been boosted by higher oil prices as traders focus on discussions to open the Strait of Hormuz.
Oil prices steadied in volatile trading on Wednesday, having earlier moved $1 higher, after forecasters cut projections for 2026 global oil demand, while attacks on ships in the Middle East continued as talks to end the Iran war hit an impasse.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.17% to 99.98, with the euro down 0.14% at $1.1524.
Upcoming Economic Data and Fed Projections
Attention now turns to Thursday's producer price inflation data and Friday's retail sales figures, which should offer further insight into both inflation trends and the broader health of the U.S. economy.
Markets will also be watching the Fed's updated economic projections at the September meeting — projections that Fed Chairman Kevin Warsh has said he'd prefer markets focus on less, as part of a shift away from explicit forward guidance.
Chandler said this could shape the timing of any hike.
"If (Warsh) wants to downgrade the summary of economic projections, the best way to do it would be not to hike rates when they're released, so I've been always penciling in an October rate hike instead of September," Chandler said.
Traders see a 56% probability of a rate increase by October.
Yen and Other Currency Moves
Japanese Yen Weakness and Intervention Effects
The Japanese yen weakened 0.1% to 159.45 per dollar. It has pared gains that were made during the joint intervention in late July by U.S. and Japanese authorities to strengthen the Japanese currency.
"The release of the latest CFTC report at the end of last week did show that that intervention triggered a sharp squeeze of speculative short yen positions," said Lee Hardman, senior currency economist at MUFG.
"If there is no change in fundamentals, speculators will be encouraged to rebuild short yen positions at a time when stable financial market conditions remain supportive for carry trades," he added.
New Zealand Dollar and Political Developments
The New Zealand dollar fell 0.37% versus the greenback to $0.5857 after Prime Minister Christopher Luxon said on Wednesday he had won a confidence vote of ruling party lawmakers, following speculation about his leadership months from a general election.
(Reporting by Karen Brettell; Additional reporting by Stefano Rebaudo; Editing by Nick Zieminski)