The US Dollar Index ticked up on Friday after August inflation data lifted the odds of a Federal Reserve rate hike next week to nearly 87%. The Japanese yen still notched its first two-week winning streak against the dollar since May, while the euro headed for a weekly loss a day after the European Central Bank raised rates.
Fed hike bets firm up after CPI
The US Dollar Index gained 0.1% to 99.13 on Friday, though it was little changed for the week. Traders focused instead on Treasury yields and a rally in the yen.
Behind the move was the August consumer price index. Headline and core CPI rose 0.4% and 0.3% month-on-month, against consensus estimates of 0.4% and 0.2%, and accelerated from July's 0.1% and 0.2%. On a yearly basis, headline CPI held at 3.4% while core CPI eased to 2.4% from 2.5%, both matching forecasts.
As a result, the odds of a quarter-point FOMC hike next week jumped to nearly 87% from about 69% before the data, according to the CME FedWatch tool. Blockbuster nonfarm payrolls and Thursday's producer price report had already tilted expectations toward tightening, and Fed Chair Kevin Warsh struck a hawkish tone at Jackson Hole, saying underlying inflation trends had not improved.
Bonds slumped after the CPI print, with the 10-year Treasury yield rising 3.2 basis points to 4.976% and the 2-year yield advancing 8.8 basis points to 4.638%. According to David Doyle, head of economics at Macquarie: "Our baseline view remains for a hike next week and our confidence in this call" increases with the CPI release.
Yen extends its rally against the dollar
The yen remained the major FX market story of the week. The USD/JPY pair fell 0.5% to 153.72 on Friday and dropped 1.6% for the week, putting the yen on track for its first two-week positive run against the dollar since early May.
The rally reflects growing conviction that the Bank of Japan will raise borrowing costs on September 18. Tokyo reported that Japan's Corporate Goods Price Index jumped 7.6% year-on-year in August, beating the 7.4% consensus and confirming that import costs are feeding into domestic pipeline inflation. DBS analysts said markets will watch whether the central bank signals a flexible, data-dependent path rather than committing to rapid successive increases.
Euro set for weekly loss after ECB hike
The euro also moved lower. The EUR/USD pair slipped 0.1% to $1.1597 and shed 0.2% for the week, a day after the ECB raised its key policy rate by 25 basis points.
The central bank cited pressure from a jump in energy prices linked to the Middle East conflict. Bloomberg News separately reported that ECB officials are expected to raise rates further, with another hike possible as soon as next month.
Source: Investing.com
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