Dollar Soars on US Inflation Data, ECB Rate Hike

The US dollar strengthened against all major peers on Thursday following the release of August's producer price data. The headline PPI rate surged to 5.4% year-over-year from an upwardly revised 4.8%, while core PPI rose to 4.6% y/y from 4.3%. These numbers bolstered expectations of a 25bps interest rate hike at the next Fed meeting, with the probability jumping to 68%. A second same-sized hike was brought forward from March to January.

Investors are now focusing on today's US CPI report for August, which could further steepen the implied path if prices producers paid were passed on to consumers. Treasury yields rose yesterday despite the US Treasury's buyback operation, and the dollar may gain more ground should the numbers exceed analysts' consensus estimates.

The ECB raised interest rates by 25bps as expected, citing growing concerns about inflation amid heightened tensions in the Middle East. The Bank upgraded its inflation projections, with President Lagarde warning about secondary effects on other prices and wages. This prompted investors to assign a 65% chance of another hike in October.