The U.S. dollar strengthened on Wednesday after consumer price inflation data for July matched economists’ expectations, while traders adjusted their expectations for when the Federal Reserve may raise interest rates.
The Consumer Price Index (CPI) increased 3.4% year over year in July, following a 3.5% rise in June. Core CPI, which excludes more volatile categories such as food and energy, climbed 2.5% over the same period, down from 2.6% in June.
Markets reduce expectations for September Fed rate hike
Following weaker-than-expected employment data that showed U.S. employers unexpectedly cut jobs in July, traders lowered their expectations for a Federal Reserve rate increase at the September 15-16 meeting.
Fed funds futures markets now indicate a 40% probability of a September rate hike, down from 44% before the inflation report and 55% a 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. The dollar really didn’t go anywhere. If anything, it was a bit firmer than I expected,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Oil prices support dollar strength
The dollar has also benefited from higher oil prices as markets continue monitoring discussions around reopening the Strait of Hormuz.
Oil prices remained volatile on Wednesday after initially rising by about $1, as concerns over Middle East shipping disruptions continued while forecasts for global oil demand growth in 2026 were reduced.
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 focus on upcoming economic data
Investors are now turning their attention to upcoming producer price inflation data and retail sales figures, which could provide additional insight into inflation trends and the overall strength of the U.S. economy.
Markets are also watching the Federal Reserve’s updated economic projections expected at the September meeting. Fed Chair Kevin Warsh has indicated that the central bank may place less emphasis on explicit forward guidance as part of a shift in communication strategy.
Marc Chandler suggested that this could influence the timing of any rate increase.
“If (Warsh) wants to downgrade the summary of economic projections, the best way to do it would be not to hike rates when they’re released, so I’ve been always penciling in an October rate hike instead of September,” Chandler said.
Traders currently see a 56% probability of a rate increase by October.
Yen weakens after intervention gains fade
The Japanese yen weakened 0.1% to 159.45 per dollar, giving back some of the gains achieved after the joint U.S.-Japan currency intervention in late July.
The intervention had temporarily strengthened the yen, but analysts noted that underlying market forces continue to support dollar demand.
“The release of the latest CFTC report at the end of last week did show that that intervention triggered a sharp squeeze of speculative short yen positions,” said Lee Hardman, senior currency economist at MUFG.
Hardman added that if fundamental conditions remain unchanged, investors may rebuild short yen positions as stable markets continue supporting carry trades.
New Zealand dollar declines after political uncertainty
The New Zealand dollar fell 0.37% against the greenback to $0.5857 after Prime Minister Christopher Luxon said he had won a confidence vote among ruling party lawmakers.
The vote followed speculation surrounding his leadership ahead of the country’s upcoming general election.
