6 days ago
Dollar Rebounds as PCE Inflation Revives Federal Reserve Hike Bets
The dollar became stronger after new inflation numbers were released.
Prices in the United States were still rising faster than the Federal Reserve wants.
Because of this, investors think the Fed may raise interest rates later this year.
Higher rates can make a country’s currency more attractive to investors.
The dollar had recently fallen after Scott Bessent announced plans involving government-bond purchases.
The latest rise recovered about half of that earlier loss.
However, consumer spending adjusted for inflation was flat in July, suggesting the economy may be slowing.
Investors are watching Kevin Warsh’s speech for clues about what the Fed might do next.
The Bloomberg Dollar Spot Index rose 0.2%, its strongest daily gain since Aug. 10.
July personal consumption expenditures inflation remained at a 3.7% annual pace, nearly twice the Federal Reserve’s target.
Traders priced in about a 40% chance of a rate hike next month and fully expected a quarter-point increase by December.
The dollar gained against all Group of 10 currencies except the Australian dollar, while the yen fell as much as 0.2%.
Markets are awaiting Kevin Warsh’s Friday speech in Jackson Hole for clues about future interest-rate policy.
- Who
- The United States dollar, the Federal Reserve, Treasury Secretary Scott Bessent, traders and investors, and Fed Chairman Kevin Warsh.
- What
- The dollar posted its biggest gain in more than two weeks as inflation data strengthened expectations for Federal Reserve rate increases.
- Where
- The currency move occurred in global financial markets, while the upcoming speech will take place at the Jackson Hole symposium in Wyoming.
- When
- The dollar rose Wednesday after July inflation data; Warsh’s market-watched speech is scheduled for Friday.
- Why
- The personal consumption expenditures price index rose 3.7% annually, supporting expectations of higher interest rates, although flat real consumer spending limited the dollar’s advance.
Dollar-Supportive Interpretation
Dollar-Risk Interpretation
Inflation and interest rates
Dollar-Supportive Interpretation
The 3.7% PCE inflation rate shows that inflation has not fully disappeared and could support Federal Reserve rate hikes, strengthening the dollar.
Dollar-Risk Interpretation
Inflation was described as firm but not dramatically strong, while flat real consumer spending and signs of economic cooling could limit the case for aggressive tightening.
Treasury yields and policy
Dollar-Supportive Interpretation
Higher real yields, stronger economic data and a flatter yield curve can reinforce the dollar’s carry and growth appeal.
Dollar-Risk Interpretation
Concerns about policy credibility and government efforts to suppress long-term yields could weigh on the dollar even when nominal yields rise.
Warsh’s Jackson Hole speech
Dollar-Supportive Interpretation
A statement that rate increases remain possible if disinflation stalls would reassure investors and support the dollar.
Dollar-Risk Interpretation
Avoiding near-term policy guidance or failing to clarify the Fed’s intentions could create uncertainty and produce a weaker dollar outcome.
Key facts
- Dollar move
- The Bloomberg Dollar Spot Index gained 0.2%.
- Daily performance
- It was the index’s largest gain since Aug. 10.
- July inflation
- The personal consumption expenditures price index rose at a 3.7% annual pace.
- Rate-hike odds
- Traders assigned roughly a 40% chance to a rate increase next month.
- December expectations
- A quarter-percentage-point increase was fully expected by December.
- Yen performance
- The yen weakened as much as 0.2% to 159.45 per US dollar.
- Consumer spending
- Inflation-adjusted US consumer spending was flat in July.
Quotes
Nathan Thooft
Investment strategist at Manulife Investment Management
“While the dollar sentiment has taken a bit of a hit amid ongoing signs of increased policy activism, the market may be questioning just how aggressive policy makers are prepared to be in suppressing yields. There are also clear two-way risks going into Chair Warsh’s Jackson Hole speech, which remains a wild card.”
livemint.com
“PCE wasn’t dramatically strong, but it was firm enough to remind investors that inflation hasn’t fully disappeared”
livemint.com
Steven Englander and John Davies
Strategists at Standard Chartered Bank
“Investors would take comfort if he indicated that he would support hiking if disinflation progress stalled. The worst dollar outcome, in our view, would be avoiding discussion of near-term policy.”
livemint.com
Sources
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