Dollar steadies as strong U.S. inflation curbs chance of aggressive Fed rate cut

FILE PHOTO: A trader shows U.S. dollar notes at a currency exchange booth in Peshawar, Pakistan December 3, 2018. REUTERS/Fayaz Aziz

By Shinichi Saoshiro

TOKYO (Reuters) – The dollar was steady on Friday, having regained some traction against its peers after stronger-than-expected U.S. inflation data tempered the prospect of an aggressive Federal Reserve interest rate cut later this month.

The core U.S. consumer price index excluding food and energy components rose 0.3% in June, the largest increase since January 2018, data on Thursday showed.

The signs of a pick-up in underlying inflation, along with separate data on weekly jobless claims showing the labor market remained solid, curbed financial market expectations of a more aggressive 50 basis point cut at the Fed’s July 30-31 meeting.

Markets are still fully priced for a quarter percentage point cut as U.S. policymakers seek to support a slowing economy.

The dollar was little changed at 108.390 yen after rebounding from a low of 107.860 plumbed on Thursday in response to dovish comments from Fed Chairman Jerome Powell, which had revived the chance of a 50 basis-point cut.

“The dollar bounced back as the strong U.S. CPI got the market to question the Fed’s view on prices and whether inflation was really as weak as projected,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.

“Expectations for a 50 basis point cut had risen after Powell’s comments but were lowered again by the CPI. Until the Fed’s meeting later this month, the prospect of a 50 basis point cut will continue ebbing back and forth on each major data release.”

The dollar index (DXY) against a basket of six major currencies stood little changed at 96.972 after retracing much of its losses on Thursday, when it had briefly stooped to a six-day low of 96.795.

The index hit the low after Powell said in a midweek congressional testimony that the Fed was ready to “act as appropriate,” given the U.S. economy was still under threat from disappointing factory activity, tame inflation and a simmering Sino-U.S. trade war.

Comments by Chicago Fed President Charles Evans scheduled later on Friday and New York Fed President John Williams due on Monday will provide a chance to gauge how dovish the central bank really is, said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

“If these Fed officials are not as dovish as Powell, and if the New York Fed’s manufacturing survey on Monday prove stronger than forecast, they could show that the dollar weakening in response to Powell’s congressional testimony was overdone.”

The euro (EUR=) was a shade stronger at $1.1264 but off a high of $1.1285 scaled on Thursday prior to the U.S. inflation data.

The Australian dollar nudged up 0.1% to $0.6985, adding to the previous day’s modest gains.

The U.S. Treasury 10-year yield (US10YT=RR), which often dictates the direction of the dollar, was at 2.125% after jumping 8 basis points overnight on the strong U.S. inflation data and a weak 30-year bond auction.