The US dollar logged modest gains at the end of the trading week after a firm consumer price index (CPI) report increased odds that the Federal Reserve will raise interest rates next week.
The US Dollar Index (DXY), a measure of the greenback against a weighted basket of currencies, rose 0.05% to 99.10, from an opening of 99.05. The index will post a tepid weekly loss of 0.1% and is up 0.8% year-to-date.
According to the Bureau of Labor Statistics (BLS), the US annual inflation rate was unchanged at 3.4% in August for the second straight month, in line with economists’ expectations.
From July to August, consumer prices rose 0.4%, also matching market estimates.
Stripping out food and energy prices, core inflation slowed to 2.4%, below the consensus forecast. But it rose at a higher-than-expected pace of 0.3%.
Gas and the broader energy index drove much of last month’s increase.
But traders immediately amplified their bets that the firm inflation print will force the Fed’s hand and prompt a rate hike at next week’s policy meeting.
Futures market data suggest investors are betting on an 85% chance of a quarter-point rate hike. At the same time, US stocks rallied for the first time during the holiday-shortened trading week on expectations that the Fed will hold steady at the two-day Federal Open Market Committee meeting.
The idea is that the latest bout of inflation is fueled almost entirely by the oil price shock, out of the Fed’s hands. Additionally, the monetary playbook is that officials do not respond to supply shocks.
With core inflation now at its lowest level since March 2021, structural inflation remains intact.
“The conflict is a major energy shock to the global economy,” said Joe Seydl, a senior markets economist at J.P. Morgan Private Bank, according to CNBC. “If the conflict never happened this year, I don’t even really think we’d be talking about inflation with much interest.”
US Treasury bond yields were mixed as the week closed. The two-year yield, which is sensitive to Fed policy expectations, surged eight basis points to 4.63%. The benchmark ten-year yield was unchanged at 4.95%, while the 30-year fell two basis points to 5.34%.
The USD/CAD currency pair rose 0.24% to 1.3866, from an opening of 1.3833. The EUR/USD pair tumbled 0.1% to 1.1600, from an opening of 1.1612.