Dollar treads water after tame US inflation report, yen rally stalls
Updates as of 1435 ET
By Alden Bentley
NEW YORK, July 26 (Reuters) -The dollar ended little changed on Friday, pressured by a fall in Treasuryyields after a tame U.S. inflation report that investors said kept the runway for the expected September Federal Reserve easing clear.
The Commerce Department's June personal consumption expenditures (PCE) price index nudged up 0.1%, as expected, after being unchanged in May, underscoring an improving inflation environment.
Year over year, the PCE price index climbed 2.5% after rising 2.6% in May, also in line with forecasts by economists polled by Reuters. The Fed closely tracks the PCE price measures for monetary policy, and subsiding inflation pressures could help officials who are meetingnext week gain confidence that inflation is moving toward the U.S. central bank's 2% target.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said that PCE data released a day earlier alongsidea surprisingly strong 2.8% growth rate readingon secondquarter GDP prompted last minute anxiety about hottermonthly data.
So the risereported Friday was a relief compared to Thursday's number showing core PCE prices rising at a 2.9% rate.
"The number was good enough," Englander said. "It wasn't a home run but compared to yesterday markets said 'yep nothing to worry about here, it doesn't really derail September and they (the Fed) weren't going to cut in July anyway. So life goes on.'"
Meanwhile, the yen JPY=EBS has dominated currency markets this month after surging to a near three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96 before Bank of Japan currency intervention and expectations that the Bank of Japan would deliver a hawkish policy tweak at its meeting next week flushed out yen carry-trade shorts.
The Federal Open Market Committee meets July 30 and 31, the same days as the BOJ. It is expected to hold borrowing costs steady but traders continue to bet the Fed will cut at its next meeting in September and see up to two more rate cuts this year. FEDWATCH
The yield on benchmark U.S. 10-year notes US10YT=RR fell 5.4 basis points, while two-year note US2YT=RR yields, which typically move in step with interest-rate expectations, were down 5.6 basis points after the report.
The Bank of Japan, on the other hand, may raise rates next week, with markets pricing in a 64% chance of a 10 bps hike 0#BOJWATCH. Expectations of narrowing U.S.-Japan interest rate differentials have reduced the confidence in using low-yielding yen as a funding currency for investments in other economies. It still pays to be short yen, but increased volatility makes it harder to hold on to those positions.
"What you're seeing is Japanese investors and foreign investors leaving the Japanese market and investing in global tech, predominantly. So unless whatever the BOJ does persuades (investors) to come back into the Japanese asset market, it's very hard to make the case that the yen is in the midst of a turning point for now," he said.
Dollar/yen weakened 0.1% to 153.77 in late trade. The euro EUR= went up 0.13% to $1.0858.
The dollar index =USD, which measures the greenback against a basket of six currencies including the yen and the euro, fell 0.04% to 104.29.
Sterling GBP= strengthened 0.17% to $1.2873.That price is well below the one-year high of $1.3044 hit last week, with traders pricing a 50% chance of the Bank of England cutting rates when it meets next week. Markets are anticipating 51 bps of cuts this year. 0#BOEWATCH
Dollar/Canada CAD= inched up0.05% to 1.3811.
Against the Swiss franc CHF=, dollar strengthened 0.19% at 0.8830. The Australian dollar AUD= strengthened 0.28% to US$0.6556 and kiwi NZD= strengthened 0.1% to US$0.5892.
The dollar firmed 0.07% against the Chinese yuan CNY=CFXS to 7.2502 yuan.
In cryptocurrencies, bitcoin BTC= gained 3.32% at $67,440.00. Ethereum ETH= rose 3.17% at $3,253.30.
World FX rates https://tmsnrt.rs/2RBWI5E
The yen has surged against the dollar https://reut.rs/4c0H7oK
Reporting by Alden Bentley in New York, Amanda Cooper in London and Ankur Banerjee in Singapore; Editing by Kirsten Donovan, Angus MacSwan, Rod Nickel and Chizu Nomiyama
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