The US dollar moved higher on Thursday after stronger-than-expected wholesale inflation reinforced concerns that price pressures remain persistent.
At the same time, the European Central Bank raised interest rates as higher energy costs pushed Eurozone inflation further above target.
Euro Slips Despite ECB Rate Hike
The euro fell around 0.15% against the US dollar, giving back part of its recent gains.
The move came even after the ECB raised its deposit rate from 2.25% to 2.50%, marking its second interest-rate increase of the year.
However, the decision had already been widely expected by markets. As a result, the immediate impact on the euro remained limited.
Before the decision, EUR/USD had climbed toward $1.1670, near its highest level in more than a week.
Dollar Index Moves Higher
The US Dollar Index, which measures the greenback against six major currencies, rose around 0.2% to 99.008.
The dollar benefited from stronger US inflation data and growing expectations that the Federal Reserve could raise interest rates again.
However, gains remained relatively contained as traders continued to assess the outlook for monetary policy in both the United States and Europe.
Rising Oil Prices Add to Eurozone Inflation Risks
A sharp escalation in tensions across the Persian Gulf pushed Brent crude above $101 per barrel.
The surge in oil prices has raised concerns about another wave of cost-driven inflation across European economies that depend heavily on imported energy.
Higher energy costs have already changed expectations for ECB policy.
Markets recently shifted from expecting a prolonged pause to fully pricing in another rate increase, helping push Eurozone bond yields higher and supporting the euro before Thursday’s decision.
Markets Focus on Christine Lagarde
Investors are now watching ECB President Christine Lagarde for clues about what comes next.
Attention is focused on the ECB’s latest inflation projections and whether policymakers view Thursday’s rate hike as a one-off response to the energy shock or the beginning of a broader tightening cycle.
Daniela Hathorn, senior market analyst at Capital.com, said markets are particularly focused on whether the latest move provides enough protection against the energy shock or whether further tightening remains likely.
Hot US Inflation Supports the Dollar
The latest US Producer Price Index data came in stronger than expected, reinforcing concerns that inflation may remain sticky.
That strengthened expectations for another Federal Reserve rate hike.
Swap markets now imply roughly a 62% probability of a 25-basis-point increase at the Fed’s September 15-16 meeting.
The odds had stood closer to 60% earlier in the week.
Expectations for tighter monetary policy had already increased following stronger-than-expected US nonfarm payrolls data.
Dollar Remains in a Tight Range
Despite stronger inflation data and oil prices above $100 per barrel, the dollar has struggled to develop a clear directional trend.
US Treasury yields have provided some support, with the benchmark 10-year yield holding near 4.85%.
However, dollar gains were limited after the US Treasury announced a $6 billion debt buyback.
Some investors had expected a larger operation, reducing the perceived liquidity impact of the announcement.
US CPI Becomes the Next Major Test
Markets are now turning their attention to the upcoming US Consumer Price Index report.
The CPI release will be the final major inflation indicator before the Federal Reserve’s September policy decision.
A stronger-than-expected reading could increase expectations for another Fed rate hike and provide additional support for the dollar.
A softer result, however, could reduce those expectations and weaken the greenback.
Yen Strengthens on BOJ Rate Hike Expectations
The Japanese yen also gained against the dollar, rising around 0.35%.
The currency remained near seven-month highs as traders continued to reduce short-yen positions and price in tighter monetary policy from the Bank of Japan.
Money markets broadly expect BOJ Governor Kazuo Ueda to raise interest rates by 25 basis points at the September 18 meeting.
Those expectations have been supported by stronger Japanese economic data, including revised second-quarter GDP growth of 1.4%, as well as elevated import inflation.
Japan Intervention Remains in Focus
Currency traders are also closely monitoring Japan’s intervention strategy.
Official data showed that Japan’s foreign securities holdings fell sharply in August, reflecting funding used during recent currency intervention operations involving Tokyo and Washington.
The developments have encouraged traders to unwind yen carry trades, providing additional support for the Japanese currency.
With the Federal Reserve, ECB and Bank of Japan all in focus, currency markets are entering a period of heightened sensitivity to inflation data, central-bank guidance and energy prices.
