The U.S. dollar’s recent rally lost momentum on Thursday after softer-than-expected signals from the latest inflation data prompted traders to scale back expectations of an imminent Federal Reserve interest-rate increase.
The greenback was little changed against the Japanese yen during Asian afternoon trading, although it remained on track for a weekly gain of about 1%. Investors have been rebuilding dollar positions following the sharp decline triggered by the recent joint intervention by the United States and Japan in the foreign exchange market.
The dollar index, which measures the U.S. currency against the yen and five other major currencies, was broadly flat at 99.976. It was nevertheless heading for a 0.4% gain for the week.
U.S. consumer prices rose 0.1% in July, matching economists’ expectations. The reading prompted financial markets to lower the probability of a Federal Reserve rate hike in September to about 40%, from 54% a week earlier, according to CME Group’s FedWatch tool.
Michael Wan, a currency strategist at MUFG, said the Federal Reserve now faces a difficult balancing act between persistent inflation concerns and signs of weakness in the U.S. labour market.
The challenge has become more pronounced following last Friday’s weaker-than-expected July payrolls report, which raised concerns about the resilience of employment growth.
"We think that the FOMC is likely to maintain a restrictive holding pattern in September rather than a pivot towards a hike," Wan said in a note.
Yen Faces Renewed Pressure
The dollar was trading at around 159.35 yen, keeping it close to the psychologically important 160 level. Some investors regard that threshold as a potential trigger for renewed Japanese action to support the yen.
The exchange rate had fallen sharply following the rare coordinated U.S.-Japanese intervention at the end of July. The dollar dropped from close to a four-decade high of around 164 yen to about 155.20 yen over three days.
Shusuke Yamada, head of Japan FX and rates research at Bank of America, said markets would assess Tokyo’s willingness to defend the yen largely through movements in the dollar-yen exchange rate and the policy response that follows.
"A break above 160 would likely be interpreted as a sign of limited policy resolve, while successful intervention that pushes USD/JPY below 155 would have strengthened perceptions of strong commitment at least until recently," Yamada said.
He added that confidence in Japan’s willingness to intervene had initially strengthened after the coordinated action with Washington on July 31.
"Confidence in Japan's commitment to defending the yen improved after coordinated intervention with the U.S. on July 31. However, as USD/JPY has rebounded without any intervention over the past week, that credibility appears to have eroded."
Major Currencies Mixed
Elsewhere in the currency market, the euro was little changed at $1.1525, while sterling slipped 0.04% to $1.3491 ahead of a series of economic indicators from Britain, including gross domestic product figures.
The Australian dollar declined 0.2% to $0.7048 but remained near Wednesday’s 10-week high of $0.7091.
Christopher Kent, assistant governor of the Reserve Bank of Australia, said at a Reuters NEXT Newsmaker event in Sydney that inflation risks remained heavily tilted to the upside. He warned that interest rates could rise again if those risks materialised.
"We see the risks on inflation as very much to the upside," Kent said, adding that rates would need to rise again if those risks became reality.
The New Zealand dollar fell 0.4% to $0.5833 after unexpectedly weak inflation-expectations data raised questions over whether the country’s central bank would need to pursue aggressive interest-rate increases.
The currency has gradually retreated after reaching its strongest level since early June earlier this month.
In the cryptocurrency market, Bitcoin edged higher to trade at approximately $63,883.
For investors, the latest moves underscore the competing forces shaping global currency markets: easing expectations for near-term U.S. rate increases are limiting the dollar’s upside, while uncertainty over Japan’s willingness to intervene continues to keep the yen under pressure.