(Bloomberg) — The dollar rose by the most in over two weeks, recovering about half of the losses triggered by Treasury Secretary Scott Bessent’s surprise move last week to prop up the bond market, as inflation data bolstered bets that the Federal Reserve will start raising interest rates by year end.
The Bloomberg Dollar Spot Index ended the day up 0.2%, tracking Treasury yields higher, in the biggest gain since Aug. 10. The moves came after the personal consumption expenditures price index, the Fed’s favored gauge of inflation, continued to rise at a 3.7% annual pace in July, nearly twice the central bank’s target.
“PCE wasn’t dramatically strong, but it was firm enough to remind investors that inflation hasn’t fully disappeared,” said Nathan Thooft at Manulife Investment Management.
The figures left traders putting a roughly 40% chance on rate hike next month, with a quarter-percentage-point increase fully expected by December.
The dollar’s move erased about half of the drop that was seen after Bessent unveiled plans to step up government-bond purchases a week ago. That move, aimed at pulling down long-term interest rates, rattled overseas investors and rekindled speculation that the Trump administration’s policies will cause a pullback from the dollar as a haven and reserve currency.
What Bloomberg Strategists say…
“A rise in real yields accompanied by curve flattening and stronger data carries a very different signal from one driven by concerns over policy credibility and inflation risk. The former reinforces the carry and growth appeal of the dollar. The latter raises questions around the policy mix and weighs on the currency even as nominal yields climb. The dollar is stuck in that game of yo-yo.”
—Brendan Fagan, Macro Strategist, Markets Live
For the full analysis, click here
The dollar advanced against all of its peers in the Group of 10 except the Australia’s currency Wednesday, with the New Zealand dollar and the Swiss franc among the worst performers. The yen traded weaker, falling as much as 0.2% to 159.45 per US dollar.
The dollar’s advance was tempered by separate data that showed inflation-adjusted consumer spending in the US was flat in July, adding to a string of reports suggesting the economy is cooling. Traders are now largely awaiting a Friday speech by Fed Chairman Kevin Warsh at the flagship symposium in Jackson Hole, Wyoming, for insights on where rates are likely headed.
“While the dollar sentiment has taken a bit of a hit amid ongoing signs of increased policy activism, the market may be questioning just how aggressive policy makers are prepared to be in suppressing yields,” said Alex Cohen, a foreign-exchange strategist at Bank of America. “There are also clear two-way risks going into Chair Warsh’s Jackson Hole speech, which remains a wild card.”
The relative-strength index for Bloomberg’s dollar gauge — a measure of momentum — had slipped below 30 last week, the lowest since January, pointing to the selloff becoming stretched. This week, the RSI indicator has been moving higher, meaning that the buying momentum has improved.
With Warsh opting out of the previous practice of forward guidance on the likely path of rates, his public comments Friday may inject fresh volatility into markets. If he expresses willingness to raise rates if needed, that would be supportive of the dollar, according to Standard Chartered Bank’s strategists Steven Englander and John Davies.
“Investors would take comfort if he indicated that he would support hiking if disinflation progress stalled,” they wrote in a note. “The worst dollar outcome, in our view, would be avoiding discussion of near-term policy.”
(Updates markets, adds comments from Standard Chartered)
More stories like this are available on bloomberg.com
