The US Dollar (USD) weakened against several major currencies on Friday as softer-than-expected US inflation data tempered aggressive Federal Reserve (Fed) rate hike expectations. The Producer Price Index (PPI) for July was unchanged month-on-month, below the 0.2% market consensus, and the core PPI rose 0.2%, also softer than expected. On an annual basis, headline PPI climbed 4.7% and core PPI 4.2% in July, both below prior readings and forecasts [1][2][5]. As a result, traders now price in a 33-38% probability of a Fed rate hike in September, down from nearly 50% a week ago, according to the CME FedWatch Tool [1][2][5]. The USD Index remained below 100.00 in European trading [5].
The Canadian Dollar (CAD) gathered strength as the USD/CAD pair fell to around 1.3910, supported by the prospect of a sidelined Fed and rising crude oil prices amid Middle East tensions. National Bank of Canada strategists suggested that the loonie's recent softness may fade if the Fed remains on hold, with a steady policy backdrop seen as supportive for the CAD over coming quarters [1]. Crude oil prices rose about 1% to $81.30, further underpinning the commodity-linked loonie [5].
The Japanese Yen (JPY) edged higher against the British Pound (GBP) and US Dollar as expectations for a Bank of Japan (BoJ) rate hike in September intensified. Reuters reported that the BoJ is set to raise rates as soon as September and may hike more aggressively thereafter, with market-implied odds of a September hike rising to 75% from 60% a week ago [3][4][5]. However, the JPY's response has been muted, and analysts at OCBC argue that a sustained recovery will require a clearer commitment to faster policy normalization. Intervention risks are seen capping USD/JPY near 160 [4][5].
The British Pound faced mild selling pressure against the JPY and retreated against peers after UK GDP growth slowed in Q2 and industrial production contracted in June [3][7]. Societe Generale and Rabobank analysts expect the Bank of England (BoE) to keep rates on hold through 2026, citing building slack in the labor market and fiscal concerns ahead of the October 28 UK budget [3][7].
Meanwhile, the New Zealand Dollar (NZD) gained ground as traders continued to price in a Reserve Bank of New Zealand (RBNZ) rate hike next month, despite softer manufacturing data. The RBNZ's credibility was reinforced by inflation expectations remaining close to its 2% target midpoint [2].
US labor market data showed initial jobless claims at 209,000, with the 4-week average below 200,000 for only the fourth time in five years. Wage growth remains robust at 3.2%, and Commerzbank analysts note that any sustained moderation in wages and inflation will take time, likely keeping the USD supported in the near term [6].
Eurozone data showed German wholesale prices rising 0.2% in July, below the 0.4% forecast, with the year-on-year rate accelerating to 5.3%. The impact on the Euro was negligible, and EUR/GBP remained within recent ranges [7].
CONCLUSION
Easing US inflation and tempered Fed rate hike expectations have weakened the US Dollar, benefiting the Canadian Dollar, Japanese Yen, and New Zealand Dollar. However, persistent hawkish rhetoric from some Fed officials and robust US labor data suggest continued support for the USD in the near term. The market remains focused on upcoming US data and central bank decisions, with the BoJ's potential September hike and the BoE's steady policy stance also shaping currency moves.