Dollar Gains on Stronger-than-Expected US Inflation Data

The US dollar posted its largest daily gain in nearly four weeks as inflation data from July exceeded expectations, supporting Treasury yields and sending the DXY index higher. The headline PCE price index rose 0.2% month-over-month in July, beating economists' forecasts of a 0.1% increase. Core PCE, which excludes food and energy, also increased 0.2% month-over-month and 3.3% year-over-year, matching market expectations.

The inflation data suggests that the Federal Reserve retains some flexibility to keep interest rates unchanged in the near term. The July report shows flat real consumer spending, which may give the Fed room to maneuver. US Treasury yields rose after the Fed's preferred inflation gauge delivered mixed signals for July, with headline PCE inflation coming in slightly above expectations at 3.7% year-over-year.

The DXY index has now recovered roughly half of its losses triggered by Treasury Secretary Scott Bessent's surprise measures last week to support the bond market. Interest rate swaps imply a 43% probability of a Fed rate hike at next month's meeting, while a 25bp increase is fully priced in by December.