Dollar firms as inflation data weakens bets for big Fed rate cut by Reuters

By Kevin Buckland

TOKYO (Reuters) – The dollar traded near a four-week high against the euro on Thursday after signs of some rein in U.S. inflation bolstered expectations that the Federal Reserve will avoid a very big interest rate cut next week.

Meanwhile, a quarter-point rate cut from the European Central Bank (ECB) is expected on Thursday, with investors anxious for clues on how soon the monetary authority will cut again.

The dollar gained against the yen after a turbulent session on Wednesday that saw the US currency fall as much as 1.24% to its lowest level this year, before recovering all losses after the price data consumption.

Early Wednesday, Bank of Japan board member Junko Nakagawa reinforced the central bank’s tightening trend, saying low real rates leave room for further rate hikes. Another BOJ board member, Naoki Tamura, takes the podium on Thursday.

The US consumer price index (CPI) rose 0.2% last month, matching July’s advance. But excluding volatile food and energy components, the gauge rose 0.3 percent, accelerating from the previous month’s 0.2 percent increase.

As a result, traders cut the odds of a rate cut by 50 basis points (bp) on September 18, reducing the odds to 15% from an 85% probability of a 25 basis point cut. However, there is still 104bp of price cuts until the end of the year, meaning markets are still expecting a 50bp cut at the November or December meeting.

The dollar was up 0.38 percent at 142.905 yen by 0031 GMT, after falling as low as 140.71 on Wednesday for the first time since Dec. 28, following Nakagawa’s comments.

However, the yen’s failure to hold its gains “left signs of capitulation to the downside at the 140.71 low, … paving the way for a return to 145.50,” said Tony Sycamore, an analyst at IG.

The dollar-yen pair tends to track long-term US Treasury yields, which rebounded strongly after falling to a 15-month low of 3.605% on Wednesday and climbed to 3.6609% by Asian time on Thursday.

The euro fell to $1.1007, remaining close to Wednesday’s low of $1.1002, the weakest since August 16.

The ECB cut its deposit rate to 3.75% in June and a number of policymakers have already backed a further cut, suggesting their debate is likely to focus on how quickly borrowing costs need to fall at meetings subsequent

Sterling fell to $1.30360 after falling as low as $1.30025 in the previous session for the first time since August 20.

The Swiss franc was also on the back foot, with the greenback gaining 0.08% to 0.8529 francs, after touching its highest since Aug. 21 at 0.8544 francs on Wednesday.