Dollar rises as market expects Fed to hold rate steady

On Wednesday, the U.S. dollar rose as the market maintained expectations that the Federal Reserve would hold its benchmark rate steady despite the newly published consumer price data.

The dollar index, measured against six other currencies, saw a 0.19 percent increase to 104.79.

Last month, the consumer price index surged by 0.6 percent, marking its most substantial increase since June 2022. It was driven by a rise in gasoline prices, according to data from the Labor Department. Core CPI, excluding the volatile food and energy costs, grew by 0.3 percent, partly offset by lower used car and truck prices.

Marvin Loh, senior global macro strategist at asset manager State Street, said the CPI "did not change the story that much."

"Probably more important is how you look at next year's cuts and most importantly is that there was nothing in today's number that really changed next year's cut that much," said Loh.

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According to CME's FedWatch Tool, the market is now pricing in a 97 percent likelihood of the Fed keeping rates steady, an increase from 92 percent on Tuesday.

Anticipations of a 25-basis-point increase at the November meeting, which had been gradually rising earlier this week, dipped slightly from 41.1 percent to 40.8 percent in the past day.

In a Wednesday note, Goldman Sachs chief economist Jan Hatzius also mentioned that the firm anticipated the CPI report would not impact the result of next week's meeting. Hatzius maintained that the Fed would also perceive a final hike at the November meeting as unnecessary.

Barclays also reaffirmed their prediction of a Fed pause next week. However, it still anticipates another 25-basis-point hike by the year's end.

After CPI, the producer price index (PPI) and the retail sales data will come out on Thursday.

Other currencies weaken

On the other hand, the euro depreciated by 0.22 percent to $1.073 against the U.S. dollar in anticipation of the European Central Bank's (ECB) rate policy announcement.

Sources said that the ECB had predicted eurozone inflation to stay above three percent in the coming year. It supported the argument of a tenth consecutive interest rate hike this week.

The sterling dipped slightly by 0.08 percent to $1.2485 following an indication of significant contraction in the U.K. economy for July. Gross domestic product (GDP) contracted by 0.5 percent compared to June, falling short of expectations for a 0.2 percent decline.

Against the yen, the dollar gained 0.27 percent and reached 147.45, as the Japanese currency reversed a substantial increase from Monday.

Over the weekend, remarks by Bank of Japan (BoJ) Governor Kazuo Ueda raised the expectation of the central bank moving away from its dovish rate policy. It caused the yen to surge at the beginning of the week.

However, on Tuesday, influential ruling party member Hiroshige Seko asserted that he preferred BoJ's accommodating monetary policy.

The yen has faced downward pressure against the dollar, particularly since the Federal Reserve initiated its vigorous rate-hike campaign in March 2022.

Traders have been monitoring for any indications of Japan's intervention to support the yen's value, especially since it dropped below the 145 mark last month. Last year, a similar situation prompted authorities to intervene in the forex market by buying yen for the first time since 1998.