NEW YORK/LONDON :The dollar eased fractionally alongside Treasury yields after the release of tame U.S. inflation data that is unlikely to deflect the Federal Reserve from adopting a less restrictive monetary policy in the coming months.
The Commerce Department’s June personal consumption expenditures (PCE) price index nudged up 0.1 per cent, as expected, after being unchanged in May, underscoring an improving inflation environment that potentially positions the Fed to begin cutting interest rates in September.
Year over year, the PCE price index climbed 2.5 per cent after rising 2.6 per cent in May, also in line with forecasts by economists polled by Reuters. The Fed closely tracks the PCE price measures for monetary policy, and subsiding inflation pressures could help officials meeting next week gain confidence that inflation is moving toward the U.S. central bank’s 2 per cent target.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said that quarterly PCE data released with Thursday’s surprisingly strong 2.8 per cent growth rate print on last quarter’s GDP prompted mental preparation for a worse monthly read.
Thursday’s number showed PCE prices rising at a 2.9 per cent rate, so the rise reported Friday was more of a relief.
“The number was good enough,” Englander said. “It wasn’t a home run but compared to yesterday markets said ‘yep nothing to worry about here, it doesn’t really derail September and they weren’t going to cut in July anyway. So life goes on.'”
Meanwhile, the yen has dominated currency markets this month after surging to a near three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96 before Bank of Japan currency intervention and expectations that the Bank of Japan would deliver a hawkish policy tweak at its meeting next week flushed out yen carry-trade shorts.
The Bank of Japan, on the other hand, may raise rates next week, with markets pricing in a 64 per cent chance of a 10 bps hike.
“What you’re seeing is Japanese investors and foreign investors leaving the Japanese market and investing in global tech, predominantly. So unless whatever the BOJ does persuades (investors) to come back into the Japanese asset market, it’s very hard to make the case that the yen is in the midst of a turning point for now,” he said.
The dollar/yen was 0.01 per cent firmer at 153.95. The euro was up 0.18 per cent at $1.0863.
The dollar index, which measures the greenback against a basket of six currencies including the yen and the euro, was off 0.07 per cent at 104.26.
“The extent to which we’re being shocked by economic data at times is outweighed by markets repositioning based on elections and equity-market performance. Other things are happening that don’t have anything to do with whether GDP is 2.8 per cent or 2.6. per cent,” Englander said.
Sterling strengthened 0.07 per cent to $1.2860. That price is well below the one-year high of $1.3044 hit last week, with traders pricing a 50 per cent chance of the Bank of England cutting rates when it meets next week. Markets are anticipating 51 bps of cuts this year.
Dollar/Canada was up 0.09 per cent at 1.3838.
Against the Swiss franc, the dollar strengthened 0.11 per cent to 0.883. The dollar strengthened 0.27 per cent at 7.259 versus the offshore Chinese yuan. The Australian dollar strengthened 0.34 per cent to US$0.656 and kiwi strengthened 0.17 per cent to US$0.5896.
The yield on benchmark U.S. 10-year notes fell 5.2 basis points, while two-year note yields, which typically moves in step with interest-rate expectations, were down 5.4 basis points after the report.
The Federal Open Market Committee meets July 30 and 31, the same days as the BOJ. It is expected to hold borrowing costs steady but traders continue to bet the Fed will cut at its next meeting in September and see up to two more rate cuts this year.
In cryptocurrencies, bitcoin gained 3.82 per cent at $67,767.60. Ethereum rose 3.58 per cent at $3,265.80.
