Dollar Strengthens Despite Diminishing Odds of Rate Hike
The US dollar strengthened during Wednesday's trading (August 12) after US consumer inflation data aligned with market forecasts. The dollar index rose approximately 0.17% to 99.98, even though the CPI data caused investors to further scale back expectations for a Federal Reserve rate hike in September.
US inflation for July stood at 3.4% year-on-year, down from 3.5% in June, while Core CPI eased to 2.5% from 2.6%. These results indicate that inflationary pressures are coming under control and provide no new grounds for the Fed to tighten policy immediately.
The probability of a rate hike at the September 15–16 meeting fell to around 40%, down from 44% prior to the CPI release and 55% the week before. Weak labor market data for July also reinforced the view that the Fed has room to keep interest rates on hold for longer.
Nevertheless, the dollar continued to find support from high oil prices. Uncertainty regarding the reopening of the Strait of Hormuz and ongoing attacks on Middle East shipping lanes kept the risk of energy-driven inflation elevated. These conditions helped the DXY hold near the psychological level of 100.
Market focus now shifts to PPI data on Thursday and retail sales on Friday. The Japanese yen also weakened again to around 159.45 per dollar, erasing some of the gains achieved through US-Japan intervention in late July.
Newsmaker Analysis: The dollar's post-CPI strengthening suggests the market has not entirely dismissed inflation risks, despite the drop in odds for a September Fed hike. The 100 level on the DXY is the next critical threshold. Hot PPI data or continued rises in oil prices could push the dollar past this level, whereas cooler subsequent data could potentially weigh on the DXY again and provide support for gold.
Source: Newsmaker.id
