Dollar Eases on Tame Inflation Data

The dollar index rose to 99.3 on Friday, rebounding from a two-week low after stronger-than-expected US employment data bolstered expectations for tighter monetary policy. US nonfarm payrolls increased by 162,000 in August, following an upwardly revised gain of 23,000 in July and well above market expectations for a 56,000 increase. Meanwhile, the unemployment rate held steady at 4.1%, while annual wage growth eased to 3.1%, although the decline was smaller than markets had anticipated. Money markets are now pricing in a near 60% probability of a rate hike in September, according to the CME FedWatch Tool.

The dollar index held around 99 on Friday after sliding sharply in the previous session, as traders scaled back expectations for a Federal Reserve rate hike this month following dovish comments from a central bank official. Fed Governor Christopher Waller said he would support keeping rates unchanged if price pressures continue to ease, adding that his next policy decision will depend heavily on August inflation data due next week. Traders now see roughly a 50% probability of a September rate hike, down from about 63% a day earlier. Investors are also awaiting Friday’s August jobs report for further clues on the Fed’s policy outlook. The dollar also faced pressure from the surging yen as traders watched for signs of intervention while assessing the prospects for more aggressive policy tightening by the Bank of Japan this year. For the week, the dollar index is on track to decline about 0.7%.

The dollar index fell to 99 on Thursday, its lowest level in nearly two weeks, after comments from Fed Governor Waller signaled support for keeping interest rates unchanged if inflation continues to show signs of improvement. “If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,” Waller said. Also, a moderation in oil price gains offered some relief from concerns over mounting inflationary pressures. Markets are currently pricing roughly a 50% probability of a Fed rate hike this month, down from around 70% earlier in the week, when a spike in oil prices heightened inflation concerns and following Fed Chair Warsh’s pledge at the Jackson Hole Symposium to keep inflation under control. Investors now await Friday’s jobs report while the next key inflation readings are due next week. The greenback was mostly lower against the yen, with traders raising bets on Bank ?of Japan rate hikes.