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Dollar rallies against euro, yen after surprisingly firm U.S. consumer prices

The dollar lost further ground versus other major currencies on Thursday, after traders reined in bets on an aggressive interest rate hike by the Federal Reserve after softer-than-expected U.S. inflation data the previous day.


Data on Wednesday showed U.S. consumer prices were unchanged in July, month on month, after advancing 1.3% in June.


“Yesterday’s data gave hope that inflation has peaked and the Fed will need to raise rates less sharply to keep inflation under control,” currency analysts at Commerzbank said in a note.


Traders pared bets the Fed would raise rates by 75 basis points for a third straight time at its September policy meeting, and now see a half-point increase as the more likely option.


Fed policymakers sought to temper any expectations of significantly looser policy, with Neal Kashkari telling a conference on Wednesday that the central bank was “far, far away from declaring victory” on inflation.


“While yesterday’s data clearly reduces the risk of further aggressive Fed action (+75bps) and therefore helps curtail US dollar demand, we equally see it as unlikely that this data alone will prompt much further US dollar selling from here,” currency analysts at MUFG said in a note.


The euro was last up 0.17% at $1.0314. The yen gained 0.18% to 133.11 yen per dollar. Sterling fell 0.29% to $1.219, after gaining more than 1% the previous day.


Stocks broke a string of three weekly losses, as investors appeared to grow more confident that the market had reached at least a temporary bottom after surrendering about half of its summer rally. Some moderating inflation fears may have also been at work, and a midweek decline in oil prices—which briefly hit their lowest level since Russia’s invasion of Ukraine—caused energy shares to underperform within the S&P 500 Index, although the sector still recorded a gain. A rally in heavily weighted Tesla helped the consumer discretionary sector outperform. Markets were closed Monday in observance of Labor Day.


The market’s upturn began Wednesday, which T. Rowe Price traders largely attributed to a “relief rally” on light trading volumes. Federal Reserve Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester also delivered comments that seemed to be more “dovish” than markets expected, with Brainard stating that she still believed the economy could avoid a recession as the Fed raised rates.


Our traders noted that signs that inflation was cooling quicker than expected also seemed to support sentiment. Stocks rallied after the Wednesday afternoon release of the Fed’s “Beige Book” summarizing economic reports from its branch banks. The report indicated that price increases were moderating in nine of its 12 districts, as “lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.” The report also noted some declines in prices for steel, lumber, and copper. A surprise moderation in Chinese producer price inflation (see below) seemed to help foster a rally on Friday.


The week’s light calendar of economic data brought what may have been confusingly mixed signals. On Tuesday, the Institute for Supply Management (ISM) and S&P Global released widely divergent final readings on August service sector activity, with the ISM gauge upwardly revised to 56.9, the fastest pace of expansion since April. However, the S&P Global measure fell more than expected, to 43.7, the biggest contraction since early 2020. (The number 50 marks the boundary between contraction and expansion for both indexes.) The ISM gauge is somewhat broader, including construction and other nonmanufacturing industries not in the S&P services measure. The labor market appeared to remain on solid footing, with weekly jobless claims coming in much lower than expected (222,000 versus roughly 240,000) and hitting their lowest level since the start of the summer.



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