Dollar holds ground after hot US inflation data trims Fed rate cut hopes

The US dollar steadied in Asian trade on Friday, holding on to overnight gains after hotter-than-expected wholesale inflation data forced traders to scale back expectations for aggressive interest rate cuts by the Federal Reserve.

As per Reuters, the euro and sterling were little changed against the dollar after sliding 0.5 per cent and 0.3 per cent on Thursday respectively. The Japanese yen, however, strengthened 0.3 per cent to 147.39 per dollar, supported by stronger-than-forecast second-quarter GDP figures.

Inflation surprise rattles markets

The move came after US producer prices recorded their fastest annual increase in three years in July, fuelled by a broad rise in the cost of goods and services. The unexpected spike in producer price inflation followed a softer consumer price reading earlier in the week, which had briefly lifted hopes of policy easing and boosted risk sentiment.

According to the CME FedWatch tool, the odds of a 25-basis-point cut at the Fed’s September meeting dipped slightly after Thursday’s data, while earlier speculation of a larger 50-basis-point move vanished entirely. Chris Weston, head of research at Pepperstone, told Reuters the data “warranted a move in front-end rates and firmer dollar … but a 25-basis-point cut remains the default setting.”

Bond yields react

US Treasury yields mirrored the shift in sentiment. The two-year yield held steady in Asia at 3.726 per cent after climbing as much as five basis points on Thursday, while the benchmark 10-year yield hovered at 4.285 per cent.

Joseph Carpuso, head of international economics at the Commonwealth Bank of Australia, told Reuters the Fed now faces “a conundrum” of elevated inflation alongside weakening job growth. He expects Fed Chair Jerome Powell to address this balancing act in his speech next week at the Kansas City Fed’s annual Jackson Hole symposium.

Political backdrop and global focus

The rate debate is also unfolding against a geopolitical backdrop. US President Donald Trump is set to meet Russian President Vladimir Putin in Alaska later on Friday. Trump has said he believes Putin is prepared to end the war in Ukraine, though he suggested peace talks would likely require a second round involving Ukrainian President Volodymyr Zelenskiy.

Crypto markets rebound slightly

In digital assets, Bitcoin and Ether inched higher after falling about four per cent each on Thursday. Bitcoin had briefly touched a record high before rate cut bets were pared back, according to Reuters.

(With inputs from the agencies)