US dollar holds modest gains after CPI data

THE US dollar index held onto slight gains on Wednesday (Sep 13), after US economic data showed inflation picked up in August, although underlying inflation pressures rose modestly and could give the Federal Reserve cushion to keep interest rates on hold at its meeting next week.

The consumer price index increased by 0.6 per cent last month, the largest gain since June 2022, the Labor Department said on Wednesday amid a jump in petrol prices. Excluding the volatile food and energy components, the CPI increased 0.3 per cent as prices for used cars and trucks declined.

“The move higher in headline inflation is a head-fake since it was mostly driven by a huge 10.5 per cent jump in energy commodity prices,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

“The head-fake can still be a headache for the Fed as they have to explain why inflation is trending lower despite what people are seeing at the pump. Shelter inflation is continuing its slide towards something less ridiculous.”

The US dollar index, which tracks the currency against a basket of rival currencies, was modestly higher but off earlier highs with a gain of 0.03 per cent to 104.62.

The Fed is scheduled to make its next policy announcement at the conclusion of its Sept 19-20 meeting.

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The euro meanwhile fell 0.2 per cent to US$1.0731 as markets raised their bets on further ECB rate hikes, despite recent data showing that the decline in eurozone business activity accelerated faster than initially thought last month.

Money markets are now pricing in an almost 70 per cent chance of a 25 basis point move this week.

A source told Reuters that the ECB expects inflation in the 20-nation eurozone to remain above 3 per cent next year, bolstering the case for a 10th consecutive interest rate increase on Thursday.

“With fresh signs of inflationary pressures, investors also moved to price in a growing chance that the ECB would in fact go ahead with another hike tomorrow,” said Jim Reid, strategist at Deutsche Bank.

Sterling slipped 0.2 per cent to US$1.2471, on track for its biggest daily drop in a week as the UK economy contracted by 0.5 per cent in July, a worse than anticipated 0.2 per cent contraction in gross domestic product.

The yen fell as traders further digested comments from Japan’s top central banker on a possible early exit from its negative interest rate policy.

Influential ruling party lawmaker Hiroshige Seko on Tuesday also signalled his preference for ultra-loose monetary policy, after Bank of Japan governor Kazuo Ueda’s comments pushed up the yen and bond yields.

The US dollar advanced 0.2 per cent against the yen to 147.39. The yen has now firmly retraced Monday’s surge, which was its biggest one-day percentage rise in two months following the remarks by Ueda over the weekend.

Data released earlier on Wednesday showed Japan’s annual wholesale inflation slowed in August for an eighth straight month, although at 3.2 per cent it remains above the central bank’s 2 per cent target.

The yen has come under pressure against the US dollar as a result of growing interest rate differentials since the Fed began its aggressive rate-hike cycle last year while the BOJ maintained an ultra-loose monetary policy.

Since the yen weakened past the key 145 per US dollar threshold last month, traders have been on alert for any signs of intervention from Japan to shore up the currency. A year ago, that level prompted the first yen-buying intervention by the authorities since 1998. REUTERS