US Dollar Holds Steady Against Major Currencies Following Cooler Inflation Data

The US dollar remained flat against major currencies following a smaller-than-expected increase in domestic inflation, which reduced market bets on an interest rate hike from the Federal Reserve. Data from the US Commerce Department showed that the Personal Consumption Expenditures Price Index rose 0.3% in August, which was less than the 0.4% increase forecast by economists polled by Reuters. Following the data release, traders are now pricing a 37% probability of a Fed rate hike in October, down sharply from 70% a week ago according to the CME's FedWatch tool.

Market Movements

The dollar pared some of its earlier gains before recovering as US Treasury yields fell across the board. The 2-year note yield was last down 0.4 basis points at 4.885%. The euro was flat at $1.133050, remaining on track for a monthly loss against the dollar after two consecutive months of gains. The dollar was also flat at 157.34 against the yen, up 0.26% at 0.83575 versus the Swiss franc, and flat on the dollar index at 101.47. Sterling strengthened 0.26% to $1.3265 but was set for a monthly loss, while the Australian dollar weakened 0.57% to $0.6948 and the kiwi weakened 0.09% to $0.5635. Meanwhile, Minneapolis Federal Reserve President Neel Kashkari told CNBC that price growth remained a concern despite the cooler data, noting in an interview that inflation is still running at around a 3% rate and has been elevated for more than five years.

Context

The Personal Consumption Expenditures Price Index is watched closely by the Federal Reserve as its preferred gauge of inflation when deciding on monetary policy and interest rates. Central banks adjust interest rates to manage economic growth and price stability, and market expectations around these rate decisions frequently shift in response to incoming consumer price and GDP data.