Dollar gains as hotter PCE inflation keeps Fed hike debate alive
Investing.com - The U.S. dollar edged higher on Wednesday after data showed inflation remained stubbornly above the Federal Reserve’s target in July, strengthening the case for caution on interest rates ahead of Fed Chair Kevin Warsh’s speech at Jackson Hole.
The dollar index was last up around 0.1% at 98.98, while the Australian dollar remained one of the strongest major currencies after hotter-than-expected domestic inflation boosted expectations for another Reserve Bank of Australia rate hike.
The personal consumption expenditures (PCE) price index rose 3.7% in the 12 months through July, unchanged from June and above economists’ 3.6% forecast. On a monthly basis, PCE increased 0.2%, also exceeding expectations for a 0.1% rise.
Core PCE, which strips out volatile food and energy prices and is closely watched by the Fed, rose 3.3% year-on-year and 0.2% month-on-month, both matching economists’ expectations. The data therefore showed persistent inflation pressure without delivering a major upside surprise in the underlying measure.
The figures add to the Fed’s policy dilemma as officials weigh inflation that remains well above the 2% target against signs of softer economic activity. Boston Fed President Susan Collins said on Tuesday that interest rates may need to rise soon if there is not evidence of continued progress on inflation.
"We still think the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive and the labor market is softening," Elias Haddad, global head of markets strategy at Brown Brothers Harriman.
"Regardless, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds."
In contrast, broader G-10 currencies traded in tight ranges against a listless U.S. dollar, as currency desks sidelined aggressive positions ahead of crucial U.S. inflation data and central bank policy guidance.
The Dollar Spot Index held virtually unchanged, ticking up 0.1% to 98.98 as the greenback remained anchored within striking distance of last week’s three-month low.
Foreign exchange allocators are locked in a holding pattern ahead of Wednesday’s release of the July Personal Consumption Expenditures (PCE) price index - the Federal Reserve’s preferred inflation metric.
The data represents the final major economic checkpoint before Federal Reserve Chair Kevin Warsh delivers his inaugural keynote address at the Jackson Hole Economic Policy Symposium on Friday.
While the U.S. Treasury’s expanded long-end debt buybacks have temporarily calmed volatility across sovereign bond hubs, currency desks note that technical liquidity fixes have failed to resolve fundamental anxieties surrounding a $40 trillion federal debt load and rising debt service costs, keeping a ceiling over the greenback.
The Japanese yen edged up 0.1% to 158.97 per dollar, holding firm below levels that triggered joint intervention by U.S. and Japanese officials last month. The yen drew support from a Reuters survey showing a clear majority of economists now expect the Bank of Japan to raise its policy rate as early as September.
The euro drifted sideways, trading virtually flat near $1.1600 as regional desks digested hawkish warnings from ECB Executive Board member Isabel Schnabel, who stated that further rate hikes remain necessary despite a sharp drop in energy prices.
The Canadian dollar remained firmly under pressure, slipping 0.2% to C$1.3900 per dollar. The loonie continues to reel from the collapse of U.S.-Canada trade negotiations after Washington imposed 50% tariffs on $20 billion of Canadian exports, triggering retaliatory tariffs from Ottawa set to take effect September 8.
Broader Asian and emerging market currencies drew a modest risk-on tailwind from de-escalating geopolitical tensions in the Middle East.
Global benchmark Brent crude fell over 2% to around $87 a barrel following reports that Iran and Oman have resumed bilateral talks to manage commercial transit through the Strait of Hormuz.
The sudden prospect of restored maritime energy flows helped de-escalate cost-push inflation fears across net energy-importing Asian economies, helping stabilize regional risk appetite ahead of the week’s key macro catalysts.
(Ayushman O and Pranav Kashyap contributed reporting)