Currency Markets React to US Inflation Data, Yen Dominates

The dollar and Treasury yields eased after mild U.S. inflation data suggested a less restrictive Federal Reserve policy. The PCE price index increased by 0.1% in June, enabling potential rate cuts in September. Additionally, the yen surged due to Bank of Japan's anticipated hawkish policy shift.

The dollar and Treasury yields eased slightly on the release of tame U.S. inflation data, indicating that the Federal Reserve may adopt a less restrictive monetary policy in the coming months. According to the Commerce Department, the personal consumption expenditures (PCE) price index rose by 0.1% in June, following an unchanged index in May. This data underscores a favorable inflation environment that might prompt the Fed to cut interest rates in September.

Year-on-year, the PCE price index increased by 2.5% after a 2.6% rise in May, aligning with economist forecasts. The Federal Reserve closely monitors the PCE price measures for guiding monetary policy, and the reduced inflation pressures could boost confidence among officials meeting next week that inflation is moving towards the central bank's 2% target. Steve Englander of Standard Chartered Bank noted that the quarterly PCE data, coupled with stronger-than-expected GDP growth, alleviated concerns of higher inflation.

Meanwhile, the yen has dominated currency markets, surging to a near three-month high against the dollar. The yen started the month at a 38-year low but rebounded due to Bank of Japan intervention and expectations of a hawkish policy shift. The Bank of Japan may raise rates next week, adding to market dynamics.

(With inputs from agencies.)