By Alden Bentley
NEW YORK (Reuters) – The dollar ended little changed on Friday, pressured by a drop in Treasury yields after a weak U.S. inflation report that investors said kept the door open for the Federal Reserve’s expected monetary policy easing in September.
The Commerce Department’s personal consumption expenditures price index rose 0.1% in June, as expected, after remaining flat in May, confirming an improving inflation environment.
On a year-over-year basis, the personal consumption expenditures (PCE) price index rose 2.5% after rising 2.6% in May, also in line with expectations from economists polled by Reuters. The Federal Reserve closely watches the PCE price gauges in setting monetary policy, and easing inflation pressures could help officials meeting next week gain confidence that inflation is moving toward the U.S. central bank’s 2% target.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said the PCE data released a day earlier coupled with a surprisingly strong 2.8% second-quarter GDP growth reading prompted last-minute concern about the hotter monthly data.
So Friday’s reported rise was a relief compared to Thursday’s figure, which showed core PCE prices rising at a 2.9% rate.
“The number was good enough,” Englander said. “It wasn’t a huge success but compared to yesterday the markets said, ‘Yeah, no worries here, it doesn’t really derail September and the Fed isn’t going to cut rates in July anyway. So life goes on.'”
Meanwhile, the yen has dominated currency markets this month after rising to a three-month high of 151.945 against the dollar on Thursday. It started the month at a 38-year low of 161.96 before the Bank of Japan intervened in the currency market and is expected to implement a strict adjustment to its policy at its meeting next week, which led to a reduction in short positions in the yen market.
The Federal Open Market Committee meets on July 30 and 31, the same days as the Bank of Japan. The committee is expected to keep interest rates on hold, but traders continue to bet that the Fed will cut rates at its next meeting in September, and that it will see two more rate cuts this year.
The yield on the benchmark 10-year U.S. Treasury note fell 5.4 basis points, while the yield on the 2-year note, which typically moves in line with interest rate expectations, fell 5.6 basis points after the report.
On the other hand, the Bank of Japan may raise interest rates next week, with markets pricing in a 64% chance of a 10 basis point hike. Expectations of narrowing interest rate differentials between the US and Japan have dampened confidence in using the low-yielding yen as a funding currency for investments in other economies. It is still worth holding short yen, but increased volatility is making it harder to hold such positions.
“What you’re seeing is Japanese investors and foreign investors leaving the Japanese market and investing mainly in global technology. So unless any action by the Bank of Japan succeeds in convincing (investors) to return to the Japanese asset market, it’s very difficult to make the case that the yen is in the midst of a turning point now,” he said.
The dollar/yen fell 0.1% to 153.77 yen in late trade. The euro rose 0.13% to $1.0858.
The dollar index, which measures the value of the greenback against a basket of six currencies including the yen and the euro, fell 0.04% to 104.29.
Sterling rose 0.17% to $1.2873. That’s well below a one-year high of $1.3044 hit last week, with traders pricing in a 50% chance of the Bank of England cutting interest rates when it meets next week. Markets are pricing in 51 basis points of rate cuts this year.
The dollar/Canada rose 0.05% to 1.3811.
The dollar rose against the Swiss franc by 0.19% to 0.8830, the Australian dollar rose by 0.28% to 0.6556 US dollars, and rose by 0.1% to 0.5892 US dollars.
The dollar rose 0.07 percent against the Chinese currency to 7.2502 yuan.
In cryptocurrencies, Bitcoin rose 3.32% to $67,440.00. The cryptocurrency rose 3.17% to $3,253.30.