By Laura Matthews
(Reuters) -The dollar weakened against its major peers on Wednesday, pushing the euro to a near eight-month peak, as the U.S. consumer price index showed inflation is easing, reinforcing expectations of interest rate cuts from the Federal Reserve are nearby.
The US CPI rose moderately in July and the annual increase in inflation slowed to below 3% for the first time since early 2021, raising expectations for a rate cut next month, although it was likely less aggressive than markets had hoped.
The report adds to the mild increase in producer prices in July and suggests that inflation is on a downward trend. This should give the Fed room to focus more on the labor market as concerns about a sharp slowdown grow.
“It slightly lowered expectations of a 50 basis point rate cut in September,” said Amo Sahota, managing director of Klarity FX, in San Francisco. “There has been a much calmer, reflective approach to the inflation rate.”
The euro last rose 0.18% against the dollar to $1.1014, surpassing the highest hit during last week’s market turmoil and trading at its strongest level since January 2. The euro was slightly lower at 102.57.
Traders had widely expected a September rate cut before the producer price data and increased their bets for a 50 basis point cut after the release to 56% from 53% a day earlier, according to CME Group’s (NASDAQ:) FedWatch Tool. .
Sahota thinks the market is still on track for three 25 basis point cuts from the Fed this year, rather than 100 basis points by year end.
STERLING DIPS, KIWI SLIDES
Sterling failed to gain against the weaker dollar, falling 0.29% to $1.2825 after data showed the rise in UK consumer price inflation in July was smaller than expected as services prices – closely monitored by the Bank of England – rose less quickly.
However, the pound weakened against the euro, which rose 0.47% to 85.87 pence. Financial markets were pricing in a 44% chance of a quarter-point BoE rate cut in September, up from 36% before the data was released.
Yields fell 1.28% to 0.5999 after the Reserve Bank of New Zealand cut the cash rate by a quarter of a point, the first easing since early 2020 and a year ahead of its own projections.
Meanwhile, Japanese Prime Minister Fumio Kishida’s decision not to run for re-election in his party’s leadership race next month had little effect on markets, analysts said.
The yen last traded at 147.26 against the dollar.
“The Fed is cutting rates. That should be negative for the dollar,” said Vassili Serebriakov, currency strategist at UBS. “The currency that is still likely to do best against the dollar is the yen. The Bank of Japan is raising rates, and that also helps narrow interest rate differentials.”
