Key Highlights

  • The dollar index rose 0.17% to 99.98 after July CPI matched expectations, with annual Inflation at 3.4% and Core Inflation at 2.5%
  • Fed funds futures traders now price in 40% odds of a September rate hike, down from 55% a week earlier following a weak July jobs report
  • The Japanese yen weakened 0.1% to 159.45 per dollar, paring gains from a late-July joint US-Japan intervention to support the currency
  • Traders see a 56% probability of a Fed rate increase by October, with some analysts favoring an October move over September

Dollar Firms as Inflation Data Matches Forecasts

The dollar gained Wednesday after US consumer price inflation matched economists' expectations in July, even as traders pushed back their expectations for when the Federal Reserve is likely to raise rates. In the 12 months through July, the CPI advanced 3.4% after rising 3.5% in June, while core CPI increased 2.5% over the same period, down from 2.6% in June.

Traders have trimmed bets on a rate increase at the Fed's September meeting since a jobs report showed employers unexpectedly shed jobs in July. Fed funds futures traders are now pricing in 40% odds of a September rate hike, down from 44% before Wednesday's data and from 55% a week earlier. A chief market strategist at a foreign exchange firm said the dollar held up better than expected given the softer jobs data, noting it was if anything a bit firmer than anticipated.

Higher Oil Prices Add Support to the Greenback

The dollar has also been boosted by higher oil prices as traders focus on discussions to reopen the Strait of Hormuz. Oil prices steadied in volatile trading Wednesday, having earlier moved a dollar higher, after forecasters cut projections for 2026 global oil demand, while attacks on ships in the Middle East continued and talks to end the Iran war hit an impasse. The dollar index, which measures the currency against a basket that includes the yen and the euro, rose 0.17% to 99.98, with the euro down 0.14% at $1.1524.

Attention now turns to Thursday's producer price data and Friday's retail sales figures, which should offer further insight into inflation trends and the broader health of the economy. Markets will also watch the Fed's updated economic projections at its September meeting, projections Fed Chair Kevin Warsh has said he would prefer markets focus on less as part of a broader shift away from explicit forward guidance. One strategist said this dynamic could shape the timing of any rate move, suggesting an October hike may be more likely than September if Warsh wants to downplay the significance of the updated projections.

Yen Pares Intervention Gains as Carry Trade Appeal Persists

The Japanese yen weakened 0.1% to 159.45 per dollar, continuing to pare gains made during a joint intervention by US and Japanese authorities in late July aimed at strengthening the currency. A senior currency economist noted that recent positioning data showed the intervention triggered a sharp squeeze of speculative short yen positions, and that absent a change in underlying fundamentals, speculators are likely to be encouraged to rebuild short yen positions given stable financial conditions continue to support carry trades. Separately, the New Zealand dollar fell 0.37% against the greenback after the country's prime minister said he had won a confidence vote among lawmakers in his ruling party, following weeks of speculation over his leadership.