Dollar holds near eight-day high as sticky inflation fuels Fed hike bets

The US dollar traded near an eight-day high on Thursday as hotter-than-expected inflation data reinforced expectations that the Federal Reserve could raise interest rates before year-end, with markets now turning their attention to Fed Chair Kevin Warsh's keynote speech at the Jackson Hole symposium on Friday.

Sticky Inflation Lifts the Greenback

Data released Wednesday showed the Personal Consumption Expenditures Price Index rose 3.7% year-on-year in July, slightly above the 3.6% forecast by economists polled by Reuters, while the monthly reading came in at 0.2% versus estimates of 0.1%. Core PCE held at 3.3% annually, confirming that disinflation remains on track but at a pace too gradual to ease pressure on the Fed.reuters+2

The Dollar Index rose to 99.158, up roughly 0.3% for the week after falling 0.8% the prior week. EUR/USD slipped to around $1.1639, while GBP/USD dipped to $1.3577. The yen was largely steady near 159.45 per dollar.businesstimes+1

Markets are pricing no change to borrowing costs at the September meeting but see roughly a 70–74% probability that the Fed will hike by at least 25 basis points by December, as Middle East tensions keep oil prices elevated.reuters+1

All Eyes on Warsh

The Jackson Hole symposium begins Thursday, but the main event is Warsh's Friday address. "The reading on inflation kept the market's expectation for a Fed rate hike by year-end live, though Chairman Kevin Warsh's upcoming speech at Jackson Hole will be the ultimate test," Westpac economist Ryan Wells said.cnbc

Ahead of the symposium, Kansas City Fed President Jeffrey Schmid said the current setting of rates "is not providing restraint to the economy," suggesting he still favors hikes to return inflation to 2%. ING strategist Francesco Pesole warned that hawkish market pricing and Warsh's speech "could lift hike odds and support DXY near 99.0," though the bank still expects the Fed to hold in September.mitrade+1

Broader Crosscurrents

Fiscal credibility concerns continue to weigh on the dollar's outlook. Last week's Treasury announcement of increased long-term bond buybacks revived dollar-debasement chatter and helped push Bitcoin ↗ 0.23% up 25% in August. "I don't expect the dollar to make new highs, because the risk of a more dovish Fed repricing and the lack of US fiscal credibility are two big headwinds," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.businesstimes+1

Elsewhere, Bank of Japan Deputy Governor Ryozo Himino said timely rate hikes would help avoid an inflation spike but stopped short of signaling an imminent move, leaving the yen under mild pressure. The Canadian dollar held near C$1.3873 after President Trump said Wednesday it was "time to teach Canada you can't do this anymore," days after bilateral trade talks collapsed.reuters+2