Dollar poised to end 5-week decline as Fed rate cut expectations diminish

Dollar gains momentum: The Dollar edged close to a one-week peak against major currencies on Friday, on track to break a five-week losing streak, following strong economic data that reduced expectations for aggressive Federal Reserve interest rate cuts.

The Euro struggled near a two-week low against the Dollar, with cooling inflation in Germany and Spain reinforcing the case for European Central Bank easing.

The Yen hovered near the critical 145-per-Dollar level after weakening on Thursday, as the greenback tracked an increase in US Treasury yields.

Yen shrugs off inflation

Despite data showing core consumer prices in Tokyo rising at a faster-than-expected 2.4 per cent in August, surpassing the Bank of Japan’s 2 per cent target, the Yen largely ignored the figures. A measure excluding energy costs rose by only 1.6 per cent.

US data released overnight indicated a 3.0 per cent annualised growth rate in GDP for the second quarter, revised up from the previously reported 2.8 per cent. This exceeded economists' expectations of no change.

"The market movement was driven by this GDP reading, particularly affecting currencies and US Treasury yields," noted Rodrigo Catril, senior FX strategist at National Australia Bank. "The key takeaway is that consumer strength was better than previously thought, underscoring US exceptionalism in Q2."

Traders are now more likely to anticipate a quarter-point Fed rate cut on September 18, reducing the odds of a 50-basis point cut to 34 per cent from 38 per cent the previous day, according to CME Group’s FedWatch Tool.

The US Dollar index, which tracks the currency against a basket of six major peers, was stable at 101.34 as of 0032 GMT, after rising 0.36 per cent on Thursday and reaching 101.58, its highest since August 22.

Dollar rebounds, still declines

The Dollar is set for a 0.66 per cent gain this week, its best performance since early August, ending a five-week decline. However, for August, it is still on track for a 2.6 per cent drop, marking its worst monthly performance since November.

The Dollar eased 0.14 per cent to 144.78 Yen, after peaking at 145.55 overnight for the first time since August 23.

The Euro remained flat at $1.1082, dropping as low as $1.10555 on Thursday. Later, consumer inflation data from France, Italy, and the Eurozone as a whole are expected.

The US will also release the core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation.

Sterling held steady at $1.31655 after dipping to $1.3146 overnight, its lowest since August 23.