The U.S. dollar traded broadly flat on Thursday, while the euro and British pound moved slightly higher as investors awaited fresh U.S. inflation data for clues about the Federal Reserve’s next policy move.
The U.S. Dollar Index hovered near 98.74, down around 0.05%. Meanwhile, EUR/USD rose 0.08% to 1.1639, while GBP/USD gained a similar amount to 1.3556.
Attention is now turning to the latest U.S. inflation indicators. The Bureau of Labor Statistics is due to release August producer-price data on Thursday, followed by the Consumer Price Index report on Friday.
Asian currencies were generally subdued. The Japanese yen remained near recent highs, while the New Zealand dollar recorded modest gains.
Dollar Holds Firm as Oil Remains Above $100
The dollar remained supported as rising energy prices added to concerns about persistent inflation.
Brent crude climbed as high as $101.94 per barrel before giving back some gains. However, oil remained above the important $100 level amid escalating tensions between Iran and the United States.
Iran has indicated that it is prepared for a more intense conflict with Washington following a fresh wave of attacks on shipping and energy infrastructure.
The escalation has increased concerns about possible disruptions to Middle East oil supplies, keeping energy markets under pressure.
A senior Iranian official said Tehran had no intention of backing down despite a U.S. naval blockade and attacks on Iranian oil tankers.
Higher Oil Prices Support Treasury Yields
Rising oil prices are adding another layer of uncertainty to the inflation outlook.
Higher energy costs can feed into transportation, production and consumer prices, increasing the risk that inflation remains elevated for longer than expected.
U.S. Treasury yields have also moved higher.
The benchmark 10-year Treasury yield held near 4.85%, its highest level since late 2023.
The rise followed an announcement from the U.S. Treasury that it would buy up to $6 billion of longer-dated government debt. The move disappointed some investors who had expected a larger intervention.
Fed Rate Hike Expectations Remain Elevated
Markets continue to price in the possibility of another Federal Reserve rate increase.
Interest-rate swaps indicate roughly a 62% probability of a 25-basis-point hike at the Federal Reserve’s September 15-16 meeting.
That probability has increased slightly from around 60% earlier in the week.
The upcoming U.S. inflation reports could therefore have a major impact on expectations for monetary policy.
A stronger-than-expected inflation reading could reinforce the case for tighter policy and support the dollar. Softer data, however, could reduce expectations for another rate increase.
Japanese Yen Pauses After Strong Rally
The Japanese yen traded relatively calmly on Thursday after reaching its strongest level in several months earlier in the week.
USD/JPY hovered around 153.49 after falling as low as 152.89, a level that marked the yen’s strongest position since February.
The rally has slowed after the Japanese currency reached a seven-month high.
Markets broadly expect the Bank of Japan to raise interest rates by 25 basis points on September 18.
Friday’s U.S. inflation report could also influence the yen by affecting expectations for the interest-rate gap between the United States and Japan.
BOJ Tightening Expectations Support Yen
Several factors have contributed to the yen’s recent strength.
Expectations for faster monetary tightening by the Bank of Japan have been one of the main drivers.
Possible repatriation of Japanese capital and the unwinding of popular carry trades have also supported the currency.
The yen’s sharp appreciation has kept the possibility of further currency-market intervention in focus following Japan’s record efforts to support its currency last month.
Chinese Yuan Holds Near Multi-Year High
The Chinese yuan was largely unchanged against the dollar.
Both the onshore USD/CNY and offshore USD/CNH exchange rates traded within narrow ranges.
The offshore yuan remained near its strongest level in almost four years after Chinese inflation data showed both consumer and producer prices rising in August.
Higher energy costs contributed to the increase.
Improving inflation data has provided some support for the yuan, although investors continue to monitor the broader outlook for China’s economy.
Indian Rupee Faces Pressure From Higher Oil Prices
The Indian rupee remained under pressure as crude oil prices stayed above $100 per barrel.
India is a major importer of energy, meaning higher oil prices can increase the country’s import costs and weigh on its currency.
USD/INR traded around the 95.20 area.
Market participants expect support from the Reserve Bank of India to slow the rupee’s decline, although intervention may not be enough to completely reverse the pressure caused by higher energy costs.
Australian and New Zealand Dollars Trade Mixed
Elsewhere in Asia-Pacific currency markets, trading was relatively calm.
The Australian dollar slipped slightly to around $0.7215.
In contrast, the New Zealand dollar gained ground, rising to approximately $0.5855.
The South Korean won and Singapore dollar were broadly stable, while the Malaysian ringgit strengthened modestly against the U.S. dollar.
U.S. Inflation Data Could Drive the Next FX Move
Currency traders are now focused primarily on upcoming U.S. inflation figures.
The producer-price report and Friday’s CPI release could determine whether markets strengthen or reduce expectations for another Federal Reserve rate hike.
At the same time, oil prices, Treasury yields and geopolitical developments in the Middle East remain important drivers for global foreign-exchange markets.
Until there is greater clarity on inflation and interest rates, Asian currencies may remain sensitive to shifts in the U.S. dollar and global risk sentiment.
