The U.S. dollar held broadly steady on Friday after August inflation data showed that price pressures remained elevated but monthly increases stayed relatively contained.
Investors are now assessing whether the latest figures are strong enough to reinforce expectations for a Federal Reserve interest rate hike next week.
US Dollar Holds Near 99 After Inflation Data
The Dollar Index, which tracks the greenback against six major currencies, traded around 99.04, little changed on the day.
Before the inflation report, the index had been trading near 99.1.
The dollar had gained around 0.26% on Thursday following a stronger-than-expected U.S. producer inflation report.
US Inflation Remains Elevated
U.S. consumer prices increased 3.4% year over year in August, unchanged from July.
On a monthly basis, inflation rose 0.1%.
Core CPI, which excludes food and energy prices, increased 2.5% annually and 0.2% month over month.
The relatively muted market reaction reflected the fact that the CPI figures were broadly in line with expectations.
Fed Rate Decision Comes Into Focus
The latest CPI report followed stronger producer inflation data released on Thursday.
U.S. producer prices increased 5.4% year over year, raising concerns that higher energy costs could continue to put upward pressure on inflation.
The combination leaves the Federal Reserve facing a difficult policy decision at its Sept. 15-16 meeting.
Markets are already assigning a significant probability to another 25-basis-point rate increase.
Following the latest inflation data, expectations for tighter monetary policy remain supported by rising Treasury yields.
Euro Trades Flat After ECB Rate Hike
The euro was also relatively stable, trading near $1.1609 against the U.S. dollar.
Investors continued to assess the European Central Bank’s latest decision to raise its benchmark deposit rate by 25 basis points to 2.50%.
The move came as higher oil prices added to inflation concerns across the eurozone.
Market participants are also watching whether elevated energy prices will force the ECB to maintain a more restrictive monetary policy stance for longer.
Yen Heads for Second Straight Weekly Gain
The Japanese yen outperformed many major currencies, strengthening around 0.14% to approximately 154.18 per dollar.
For the week, the yen gained about 1.2%, marking its second consecutive weekly advance.
That represents its longest winning streak since May.
The yen’s recent strength reflects growing expectations that the Bank of Japan may raise interest rates again.
Bank of Japan Rate Hike Expectations Rise
Japanese inflation data added to expectations for tighter monetary policy.
Japan’s Corporate Goods Price Index increased 7.6% year over year in August, exceeding forecasts of 7.4%.
The data suggested that higher import costs continue to feed into domestic inflation pressures.
Markets are now pricing in a strong possibility that the Bank of Japan could raise its benchmark interest rate by 25 basis points to 1.25% at its Sept. 17-18 policy meeting.
Investors will also be watching closely for guidance from Bank of Japan Governor Kazuo Ueda.
Markets are particularly focused on whether policymakers signal a flexible, data-dependent approach rather than a rapid series of additional rate increases.
Fed Rate Hike Odds Climb
Expectations for another U.S. rate increase have strengthened following the latest producer inflation data.
Futures markets showed the probability of a 25-basis-point Fed rate hike rising to around 71.3%, up from approximately 61.2% earlier in the week.
At the same time, the U.S. 10-year Treasury yield traded near 4.97%, approaching the closely watched 5% level.
Higher bond yields have helped provide underlying support for the U.S. dollar.
Oil Prices Add to Global Inflation Concerns
Foreign exchange markets remain closely tied to developments in energy markets.
Brent crude traded near $109 per barrel following renewed geopolitical tensions in the Middle East.
Higher oil prices continue to raise concerns about renewed cost-driven inflation and slower global economic growth.
This environment could complicate monetary policy decisions for central banks in the United States, Europe and Japan.
Australian Dollar Pulls Back
The Australian dollar slipped around 0.2% on Friday after recording its strongest daily rally since June during the previous session.
Despite the daily decline, the currency remained on track for its strongest weekly performance since June.
Higher commodity prices and resilient domestic economic data helped support the Australian dollar earlier in the week.
Overall, currency markets remain focused on inflation, interest rate expectations and energy prices as investors prepare for major central bank decisions in the coming days.
