- Annual US PCE inflation data posts the biggest rise since 1982
- US labor cost index rises in Q2
- US Fed fund futures see rate spikes in February after data
- Dollar posts biggest monthly decline against yen since July 2020
NEW YORK, July 29 (Reuters) – The dollar fell to a three-week low in choppy trading on Friday, as investors’ fears of a recession outweighed inflation worries for the time being amid a mixed set of economic data.
There was also a lot of position square work at the end of the month, according to analysts.
Earlier, US economic data showed that inflation continued its blistering rise in June, keeping the Federal Reserve on course to raise interest rates as aggressively as needed.
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The personal consumption expenditure (PCE) price index rose 1.0% last month, the largest increase since September 2005, followed by a 0.6% rise in May. In the 12 months to June, the PCE price index rose 6.8%, the largest gain since January 1982. Read more
Excluding the volatile food and energy components, the PCE price index shot up 0.6% after rising 0.3% in May.
The dollar initially rallied on inflation numbers, but gains evaporated amid the University of Michigan’s final report that showed consumer inflation expectations eased in July. Continue reading
Federal Reserve Chair Jerome Powell cited last month’s Michigan survey as key to a shift towards more aggressive interest rate stance.
The greenback was also partially weighed down by data showing the Chicago Manufacturing Index fell to a 23-month low of 52.1 from a previous low of 56.0, according to Action Economics.
In afternoon trade, the dollar index, a measure of its value against six major currencies, fell 0.3% to 105.89. It previously slipped to a three-week low of 105.53.
“Traders are doing some form of position rebalancing at the end of the quarter, preparing for a time when inflation and growth rates ease and interest rate differentials against the dollar tip,” said Karl Schamotta, chief market strategist at Toronto-based payments company Corpay.
“Next week’s jobs report (US) is looming as a potential volatility catalyst and no one wants to be sidelined if job creation falls more than expected,” added Schamotta.
Another key indicator, the US Employment Cost Index (ECI), also rose. The ECI, the most comprehensive measure of labor costs, rose 1.3% in the most recent quarter after accelerating 1.4% in the January-March period, the Labor Department said on Friday. Continue reading
The index is widely regarded as one of the better indicators of labor market slack and as an indicator of core inflation.
Action Economics said in its blog following the US data that the ECI was one of the metrics that alarmed the Fed and prompted it to rise by 75 basis points.
Following Friday’s data, interest rate futures markets have priced in a 72% chance of a 50 basis point hike at the Fed’s September meeting, with a 28% chance of a 75 basis point hike. .
Interest rate markets are also predicting that the fed funds rate will peak in February 2023. Ahead of the US data, futures were betting that the fed funds rate peak would be reached this December.
The euro rose 0.2% against the dollar to $1.0213.
Against the yen, the dollar slipped 0.7% to 133.42 yen. The greenback also posted its largest monthly percentage decline since July 2020.
The yen was the primary short bet in the widening interest rate differential trade between the United States and its global peers, with the currency net shorting above the historical average of $5.4 billion despite a recent fall in the value.
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Currency bid rates at 16:02 (2002 GMT)
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Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Edited by Robert Birsel, Toby Chopra, Will Dunham and Jonathan Oatis
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