US dollar recovers from inflation-related losses; yen slumps

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar reversed losses on Thursday, led by gains against the yen, as investors digested U.S. inflation numbers that showed a moderate increase last month, but are still way above the Federal Reserve’s 2% inflation target.

The greenback climbed to five-week peaks against the yen of 144.735, and last traded up 0.7% at 144.71 yen. So far this year, the dollar has gained 10.4% versus the Japanese currency.

The U.S. unit also pared gains against the euro, which last changed hands at $1.0985, up just 0.1%. The recovery of the dollar against both the euro and yen pushed the dollar index up 0.1% to 102.56.

Earlier in the session, the dollar dropped after data showed the consumer price index (CPI) rose 0.2% last month, matching the gain in June. The CPI climbed 3.2% in the 12 months through July, up from a 3.0% rise in June, which was the smallest year-on-year gain since March 2021.

Excluding the volatile food and energy categories, the CPI gained 0.2% in July, the same as the June increase. In the 12 months through July, core CPI grew 4.7% after rising 4.8% in June.

“The story from this morning’s CPI release took a little while to settle into markets. While yes, year-over-year CPI did come in slightly below expectation, that 3.2% figure is still higher than it was last month,” said Helen Given, FX trader at Monex USA in Washington.

“It’s also still a good bit higher than the Fed’s 2% inflation target, so it’s still very much in the realm of possibility that there will be a further 25 basis point hike this year. Even if the Fed chooses not to hike interest rates again, a cut is not coming any time soon as inflation above target remains entrenched in the U.S. economy.”

San Francisco Federal Reserve Bank Mary Daly on Thursday also said more progress is needed to tame inflation, even though it is moving in the right direction. She is a voter on the Federal Open Market Committee in 2024.

She said the July CPI numbers do not mean that the Fed can declare victory over inflation, adding that the labor market is not yet balanced.

Futures on the benchmark fed funds rate have priced in a pause in rate hikes at the next meeting and for the rest of the year. The next possible move by the Fed is a rate cut in May 2024, rate futures showed.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 248,000 for the week ended Aug. 5. Economists had forecast 230,000 claims for the latest week.

In other currencies, the dollar slipped 0.1% to 0.8765 francs.

The euro gained against the yen, soaring to a 15-year high of 159.20. It was last up 0.8% at 158.96 yen.

Analysts had partly attributed the yen’s weak trend to higher oil prices, given that Japan is a major oil importer.

Investors are also on the lookout for possible intervention by the Japan to lift the yen. In September, Japan intervened when the dollar rose above 145 yen, pushing the pair to around 140 yen as the Ministry of Finance bought the yen to weaken the dollar.