By Chuck Mikolajczak
NEW YORK (Reuters) – The dollar fell on Friday after a U.S. inflation reading signaled a further easing of price pressures, while the yen strengthened against the dollar after Shigeru Ishiba, seen as an interest rate hawk, was set to become Japan’s next prime minister .
The U.S. personal consumption expenditures (PCE) price index rose 0.1% in August, in line with expectations of economists polled by Reuters, after an unrevised 0.2% gain in July. In the 12 months to August, the PCE price index rose 2.2% after rising 2.5% in July.
Additionally, consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month after an unadjusted 0.5% gain in July. The data was slightly below estimates of 0.3% but showed the economy still had some momentum in the third quarter.
The Federal Reserve recently signaled a shift in focus from inflation to maintaining a vigorous labor market, but last week it delivered a larger-than-usual 50 basis point (bp) rate cut.
“(Fed Chairman) Powell can breathe a sigh of relief,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“After pushing for a 50-basis-point cut rather than the more conventional 25-basis-point cuts, personal income and spending data to date support this decision.”
The dollar index, which measures the dollar against a basket of currencies including the yen and the euro, fell 0.17% to 100.43 after falling to 100.15, the lowest level since July 20, 2023, with the euro falling by 0, 14% to $1,116.
The dollar is down about 0.2% for the week, marking the fourth straight weekly decline and ninth in the last 10 years. The euro depreciated during the week.
Markets are fully pricing in a cut of at least 25 basis points at the Fed’s November meeting, and expectations for another increased 50 basis point cut are now up to 56.7% after the data, according to CME’s FedWatch tool, from 49.9% pre-release.
The yen strengthened after the narrow victory of Japan’s Ishiba in the leadership contest of the country’s ruling Liberal Democratic Party.
Ishiba, a former defense minister, is a critic of past monetary stimulus and told Reuters the central bank is “on the right policy path” in terms of interest rate increases so far.
Markets had largely expected a victory for hard-line nationalist Sanae Takaichi, a vocal opponent of further interest rate increases, loose monetary and fiscal policies and a weaker yen, last week.
The Japanese yen strengthened 1.88% to 142.12 per dollar, after strengthening as high as 142.09, and is on track for its biggest daily percentage gain since August 2. The dollar fell 1.25% against the yen this week, making it the third weekly decline in four.
The euro fell 1.95% to 158.67 against the Japanese currency.
European data showed that inflation in France and Spain rose less than expected, raising expectations for an October interest rate cut by the European Central Bank to more than 90%.
Meanwhile, China launched another round of stimulus measures on Friday after the country’s central bank cut interest rates and injected liquidity into the banking system in an attempt to bring economic growth back to this year’s target of around 5%.
The dollar strengthened by 0.11% to 6.979 against offshore.
Sterling fell 0.3% to $1.3375 and was up more than about 0.4% on the week, meaning it could post a second straight weekly gain.
