Dollar drifts lower as inflation data curbs Fed rate hike bets

The U.S. dollar drifted lower on Thursday after benign inflation readings reduced the likelihood of a September rate hike by the Federal Reserve, with the dollar index stalling below the 100.00 level even as geopolitical tensions in the Middle East provided some support.fxstreet+1

Wednesday's Consumer Price Index report showed U.S. consumer prices rose 0.1% in July, in line with economist expectations, while Thursday's Producer Price Index data pointed to further moderation in wholesale prices. The combined effect prompted money markets to reduce the odds of a September rate hike to roughly 40%, down from 54% a week earlier, according to CME Group's ↗ 2.62% FedWatch tool.businesstimes+1

Weekly Gains Despite Softening Outlook

Despite the pullback, the dollar remained up 0.4% for the week against a basket of major currencies, on track for its first weekly gain in three weeks. Trading has been confined to a narrow range typical of August's thinner volumes.businesstimes+1

Fed Chair Kevin Warsh has signaled a preference for a broader set of inflation metrics beyond core PCE, but markets continue to take their cues from traditional readings. "The CPI print yesterday has really given the market good reason to continue to pare back Fed tightening expectations," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.businesstimes

Currency Moves and Geopolitical Backdrop

The euro firmed to around $1.1537, supported by the European Central Bank's relatively hawkish stance, while the British pound held near $1.349 after data showed the UK economy unexpectedly grew 0.4% quarter-on-quarter in the first half of 2026.businesstimes

The Japanese yen extended its decline, with the dollar trading around 159.3 yen — roughly 2.7% below late July's 40-year highs near 164 that triggered joint U.S.-Japan intervention. Geopolitical risks from the U.S.-Iran standoff over the Strait of Hormuz kept some safe-haven dollar demand intact, with President Trump asserting U.S. control over the vital waterway.fxstreet+1

Outlook

The Norwegian crown and Australian dollar remain the year's best-performing currencies against the greenback, each gaining 5.6%. Attention now turns to the core personal consumption expenditures index on August 26 — traditionally the Fed's preferred inflation gauge — for further clarity on the rate path.businesstimes