By Alden Bentley
NEW YORK (Reuters) – The dollar ended little changed on Friday, pressured by a drop in Treasury yields after a tame U.S. inflation report that investors said kept the runway clear for expected Federal Reserve easing in September.
The Commerce Department’s personal consumption expenditure (PCE) price index rose 0.1% as expected after being unchanged in May, underscoring an improving inflation environment.
Year on year, the PCE price index rose 2.5% after rising 2.6% in May, also in line with forecasts from economists polled by Reuters. The Fed is closely monitoring PCE pricing measures for monetary policy, and easing inflation pressures could help officials meeting next week gain confidence that inflation is moving toward the U.S. central bank’s 2% target.
Steve Englander, head of G10 FX research at Standard Chartered (OTC:) Bank in New York, said PCE data released a day earlier, along with surprisingly strong 2.8% GDP growth in the second quarter, sparked last-minute concerns about warmer monthly data.
So the increase reported Friday was a relief compared to Thursday’s figure, which showed core PCE prices rose 2.9%.
“The number was good enough,” Englander said. “It wasn’t a home run, but compared to yesterday the markets said, ‘Yeah, nothing to worry about, September isn’t really going off the rails and they (the Fed) weren’t going to cut in July anyway. So life goes on.’ ”
Meanwhile, the yen has dominated currency markets this month, after rising to a nearly three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96, before the Bank of Japan’s currency intervention, and expectations that the Bank of Japan would make an aggressive policy adjustment at its meeting next week flushed the carry -trade shorts in the yen away.
The Federal Open Market Committee will meet on July 30 and 31, the same days as the BOJ. This is expected to keep borrowing costs stable, but traders remain betting the Fed will cut at its next meeting in September and see two more rate cuts this year.
The yield on U.S. 10-year benchmark bonds fell 5.4 basis points, while yields on two-year bonds, which typically move in line with interest rate expectations, fell 5.6 basis points after the report.
The Bank of Japan, on the other hand, could raise rates next week, with markets putting a 64% chance of a 10 basis point rate hike. Expectations that interest rate differentials between the US and Japan will narrow have reduced confidence in using the low-yield yen as a financing currency for investments in other economies. It still pays to short the yen, but increased volatility makes it harder to hold those positions.
“What you see is that Japanese investors and foreign investors are leaving the Japanese market and investing mainly in global technology. “So unless whatever the BOJ does convinces (investors) to return to the Japanese asset market, it is very difficult to make the case that the yen is currently in the midst of an inflection point,” he said.
Dollar/yen weakened 0.1% to 153.77 in late trading. The euro rose 0.13% to $1.0858.
The , which measures the dollar against a basket of six currencies including the yen and euro, fell 0.04% to 104.29.
Sterling strengthened 0.17% to $1.2873. That price is well below last week’s one-year high of $1.3044, with traders estimating a 50% chance that the Bank of England will cut rates at its meeting next week. Markets expect a cut of 51 basis points this year.
Dollar/Canada rose 0.05% to 1.3811.
Against the Swiss franc, the dollar strengthened 0.19% at 0.8830. The Australian dollar strengthened 0.28% to US$0.6556 and strengthened 0.1% to US$0.5892.
The dollar strengthened 0.07% against 7.2502 yuan.
In cryptocurrencies, bitcoin gained 3.32% to $67,440.00. rose 3.17% to $3,253.30.
