U.S. dollar rises as inflation data aligns with forecasts

On Friday, the U.S. dollar experienced a notable increase following the release of inflation data that aligned with market expectations. The personal consumption expenditures (PCE) price index rose by 0.2% in July, consistent with forecasts, while consumer spending also saw a 0.5% increase. This data reinforced the anticipation that the Federal Reserve would implement a smaller interest rate cut of 25 basis points in September, rather than a more aggressive reduction. The dollar rose 0.8% against the yen, reaching 146.12, and marked a 1.2% increase for the week, indicating its strongest weekly performance since mid-June. However, despite this weekly gain, the dollar was down 2.9% for August, continuing a trend of decline against the Japanese currency. The dollar index, which measures the currency's value against six major peers, climbed to a 10-day high, reflecting a 0.3% increase. Market expectations have shifted, with a 31% chance of a 50 basis-point cut next month, down from 35% the previous day. The market is fully pricing in a 25 basis-point cut, marking the Fed's first easing in over four years. Analysts noted that inflation data has become less volatile, suggesting a stable economic environment, while consumer spending continues to exceed expectations. In contrast, the euro fell against the dollar, reflecting a 1% decline for the week, despite a strong performance in August. The European Central Bank is also expected to lower interest rates, contributing to the euro's recent volatility. Overall, the dollar's rise is attributed to month-end flows and the Fed's clear signals regarding future rate cuts.