By Alden Bentley
NEW YORK (Reuters) – The dollar ended little changed on Friday, pressured by falling Treasury yields after a tender U.S. inflation report that investors said helped pave the way for an expected easing of interest rates by the Federal Reserve in September.
As expected, the Commerce Department’s PCE price index rose 0.1% in June after remaining unchanged in May, underscoring the improving inflation outlook.
The PCE price index rose 2.5% year over year after a 2.6% gain in May, also in line with the forecasts of economists polled by Reuters. The Fed closely watches PCE price measures in the context of monetary policy, and easing inflationary pressures could facilitate officials meeting next week feel more confident that inflation is heading toward the U.S. central bank’s 2% target.
Steve Englander, head of G10 foreign exchange research at Standard Chartered (OTC:) Bank in New York, said the PCE data released a day earlier, along with a surprisingly sturdy second-quarter GDP growth reading of 2.8%, had raised last-minute concerns about a stronger monthly figure.
So the boost announced Friday is a relief compared with Thursday’s data showing core PCE prices rising 2.9%.
“The number was good enough,” Englander said. “It wasn’t a home run, but compared to yesterday, the markets said, ‘Yeah, no worries, this isn’t going to derail September, and they (the Fed) weren’t going to cut in July anyway. So life goes on.’”
The yen, meanwhile, has dominated currency markets this month after rising to a near three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96 before currency intervention by the Bank of Japan and expectations that it will make a hawkish policy adjustment at its meeting next week washed out miniature carry-trade positions in the yen.
The Federal Open Market Committee meets on July 30 and 31, the same days as the BOJ. It is expected to hold borrowing costs steady, but investors are still betting the Fed will cut rates at its next meeting in September and deliver two more rate cuts this year.
The yield on the 10-year U.S. Treasury note fell 5.4 basis points, while the yield on the two-year note, which typically moves in line with interest rate expectations, fell 5.6 basis points following the report.
On the other hand, the Bank of Japan could raise interest rates next week, with markets pricing in a 64% chance of a 10 basis point hike. Expectations of narrowing interest rate differentials between the U.S. and Japan have reduced confidence in using the low-yielding yen as a currency to fund investments in other economies. It still pays to be miniature the yen, but increased volatility makes it harder to sustain those positions.
“You see Japanese investors and foreign investors leaving the Japanese market and investing mainly in global technology. So unless the BOJ does anything to convince (investors) to come back to the Japanese asset market, it’s very hard to argue that the yen is at an inflection point right now,” he said.
The dollar/yen was down 0.1% at 153.77 in tardy trading. The euro was up 0.13% at $1.0858.
The index, which measures the greenback’s value against a basket of six currencies including the yen and the euro, fell 0.04% to 104.29.
Sterling rose 0.17% to $1.2873. That’s well below last week’s one-year high of $1.3044, with traders pricing in a 50% chance the Bank of England will cut rates when it meets next week. Markets are expecting 51 basis points of cuts this year.
The Canadian dollar rose 0.05% to 1.3811.
Against the Swiss franc, the dollar strengthened 0.19% to 0.8830. The Australian dollar strengthened 0.28% to $0.6556 and 0.1% to $0.5892.
The dollar strengthened 0.07% against the yuan to 7.2502 yuan.
In the cryptocurrency market, bitcoin gained 3.32% to $67,440.00. It rose 3.17% to $3,253.30.
