US Economic Data Strengthens Dollar Amid Rising Fed Rate Hike Expectations

POLICY WIRE — New York, USA — The dollar experienced a significant rise on Wednesday following the release of U.S. economic data, which included inflation figures that slightly increased the likelihood of a rate hike by the Federal Reserve. This development comes ahead of the Jackson Hole symposium, where central bankers will convene this week.

The Commerce Department reported that the Personal Consumption Expenditures Price Index rose by 3.7% over the 12 months ending in July, matching the June figure and slightly exceeding the 3.6% forecast by economists surveyed by Reuters. On a monthly basis, the PCE increased by 0.2%, surpassing the anticipated 0.1% rise, after a 0.1% decline in June.

George Vessey, lead FX and macro strategist at Convera in London, commented on the data, stating that while the headline inflation figure was sufficient to prevent a dovish outcome, the details were not robust enough to secure a clear victory for hawks. He advised against aggressively pursuing the rally or fading it, given the multitude of competing narratives influencing foreign exchange, particularly the dollar.

The dollar index, which gauges the greenback against a basket of currencies, climbed by 0.24% to 99.145, marking its largest daily gain since August 6. The euro declined by 0.18% to $1.1653.

European Central Bank board member Isabel Schnabel emphasized the need for further interest rate increases due to the ongoing conflict in the Middle East and the strong euro zone economy, which poses upside risks to inflation. This statement followed reports that ECB policymakers are prepared to raise interest rates in September to mitigate the side-effects of the Iran war, although they show little inclination to signal further tightening beyond that.

Additional U.S. data revealed that the updated reading of second-quarter economic growth remained at 1.5%, consistent with the initial estimate. Personal income increased by 0.4% in July, surpassing the 0.2% forecast, while consumer spending, which constitutes more than two-thirds of economic activity, remained unchanged after a 0.3% increase in June.

Market expectations for a Fed rate hike have edged up following the data release, with a 40.1% chance now priced in for an increase of at least 25 basis points at the September meeting, up from about 36% prior to the release, according to CME FedWatch.

Federal Reserve Chairman Kevin Warsh is set to deliver his debut speech at the annual Jackson Hole conference on Friday. While many market participants doubt he will offer any policy outlook, Goldman Sachs chief U.S. economist David Mericle anticipates the chair will reiterate his commitment to the 2% inflation target and discuss broader economic topics.

Boston Fed President Susan Collins indicated that the Fed will need to raise interest rates soon unless upcoming data shows a sustained decline in inflation, which remains a significant concern for businesses and households.

The dollar had weakened late last week after U.S. Treasury Secretary Scott Bessent announced plans to double the size of quarterly repurchases of longer-dated bonds, raising concerns about a potential debasement of the dollar. However, the recent economic data has reversed this trend.

Barclays analysts noted that their month-end rebalancing model suggests a moderate dollar selling signal against all major currencies by month-end.

The Canadian dollar weakened by 0.24% against the greenback to C$1.387 per dollar, following Ottawa’s imposition of retaliatory tariffs on about $20 billion worth of U.S. annual imports and the rollout of aid for businesses and workers after trade talks with the U.S. collapsed over the weekend.

The Japanese yen weakened by 0.13% against the greenback to 159.37 per dollar, while sterling weakened by 0.41% to $1.3593, marking its largest daily drop since July 23.

Reporting by Policy-Wire (PW)