The U.S. dollar strengthened on Wednesday after consumer price inflation data for July matched economists’ expectations, although traders continued to reduce expectations for an immediate Federal Reserve interest rate hike.
Consumer prices increased 3.4% year over year in July, slowing slightly from the 3.5% rise recorded in June. Core inflation, which excludes volatile food and energy prices, rose 2.5% over the same period, compared with 2.6% in June.
Fed rate hike expectations decline
Despite inflation remaining above the Federal Reserve’s long-term target, traders lowered their expectations for a September rate increase following a weaker-than-expected U.S. jobs report that showed employers unexpectedly reduced payrolls in July.
Fed funds futures now indicate a 40% probability of a rate hike at the Federal Reserve’s September 15-16 meeting, down from 44% before the inflation data and 55% one week earlier.
“I thought that after the soft jobs data on Friday, that the dollar would stay soft because of the expectations of the soft CPI,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The dollar really didn’t go anywhere. If anything, it was a bit firmer than I expected.”
Oil prices support the dollar
The dollar has also benefited from higher oil prices as markets continue monitoring efforts to reopen the Strait of Hormuz and developments surrounding the Iran conflict.
Oil prices remained volatile on Wednesday after earlier gains, with investors balancing weaker global oil demand forecasts for 2026 against continued geopolitical risks and shipping disruptions in the Middle East.
The U.S. dollar index, which measures the greenback against a basket of major currencies including the euro and yen, rose 0.17% to 99.98. The euro declined 0.14% to $1.1524.
Markets await more economic data
Investor attention now turns to upcoming economic releases, including Thursday’s producer price inflation report and Friday’s retail sales figures, which could provide additional insight into inflation trends and the strength of the U.S. economy.
Markets are also watching the Federal Reserve’s updated economic projections at its September meeting. Fed Chair Kevin Warsh has indicated a preference for reducing reliance on explicit forward guidance and placing more emphasis on economic data.
Chandler suggested that this could influence the timing of future rate decisions, saying a possible shift in the Fed’s economic projections could make an October rate increase more likely than a September move.
Traders currently see a 56% probability of a rate hike by October.
Yen weakens after intervention-driven gains
The Japanese yen weakened 0.1% to 159.45 per dollar, giving back some gains made after a joint intervention by U.S. and Japanese authorities in late July aimed at supporting the currency.
Analysts said the intervention caused a sharp reduction in speculative short yen positions, but traders may rebuild those positions if economic fundamentals remain unchanged and market conditions continue supporting carry trades.
“If there is no change in fundamentals, speculators will be encouraged to rebuild short yen positions,” said Lee Hardman, senior currency economist at MUFG.
New Zealand dollar declines
The New Zealand dollar fell 0.37% against the U.S. dollar to $0.5857 after Prime Minister Christopher Luxon secured a confidence vote among ruling party lawmakers.
The vote followed speculation about his leadership ahead of the country’s upcoming general election.
