The US dollar declined on Thursday, retreating from its highest levels in 18 months as investors reassessed expectations for Federal Reserve interest rates following higher than expected US inflation data. The US Dollar Index fell 0.4% to 102.16, reversing some of the gains recorded on Wednesday after the release of the inflation report.
Data showed that US consumer prices increased by 3.7% year over year in September, accelerating from 3.4% in August and exceeding economists’ expectations of 3.6%. Core consumer inflation also rose to 2.6% annually, above forecasts of 2.5%, renewing concerns that the Federal Reserve may need to tighten monetary policy further to contain persistent inflationary pressures.
However, comments from Federal Reserve officials, including Vice Chair Michelle Bowman and San Francisco Fed President Mary Daly, suggested that policymakers may prefer to wait for greater clarity on inflation before implementing another interest rate increase. Although markets initially raised their expectations for a rate hike at the October meeting, those probabilities subsequently declined as Treasury yields fell and officials emphasized a cautious approach. Markets are currently pricing in approximately a 30% probability of an interest rate increase this month. Investors are awaiting upcoming US Producer Price Index and retail sales data, along with further statements from Federal Reserve officials, for clearer indications of the monetary policy outlook.
In currency markets, the Japanese yen strengthened, with USD/JPY declining by 0.3% after Japanese Finance Minister Satsuki Katayama renewed warnings against excessive currency movements. She reaffirmed the commitment of Japan and the United States to coordinated action against extreme foreign exchange volatility following their previous joint intervention.
Meanwhile, the Australian dollar weakened by 0.5% against its US counterpart after an unexpected decline in domestic employment in September. The Australian economy lost 39,300 jobs, contrary to expectations of an increase, pushing the unemployment rate to 4.7%, its highest level in five years. The disappointing labor market figures prompted investors to scale back expectations of further interest rate increases by the Reserve Bank of Australia.
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