Dollar Nears Four-Week High Against Euro Amid Inflation Concerns

The U.S. dollar traded near a four-week high against the euro due to persistent inflation concerns, reinforcing expectations that the Federal Reserve won't make a significant interest rate cut. Meanwhile, the European Central Bank is expected to reduce rates by a quarter-point. The dollar also gained against the yen following a turbulent session.

The U.S. dollar hovered near a four-week high versus the euro on Thursday, spurred by lingering concerns over U.S. inflation. This momentum comes as traders believe the Federal Reserve will refrain from a large interest rate cut next week. Concurrently, investors anticipate the European Central Bank (ECB) will announce a quarter-point rate reduction later on Thursday, stirring curiosity about future rate cuts.

The dollar also strengthened against the yen after a volatile Wednesday session. Despite a significant drop to its lowest point this year, the dollar rebounded after the release of consumer price data. Junko Nakagawa, a Bank of Japan board member, reiterated the central bank's tightening stance, suggesting low real rates could allow for additional hikes.

Further bolstering the dollar, BOJ board member Naoki Tamura, known for his hawkish views, hinted that the market's expected tightening pace might be too conservative. According to Shoki Omori, Mizuho Securities' chief Japan desk strategist, these speeches indicate a notable shift in the BOJ's communication style, aiming for forward guidance instead of traditional media outlets, contributing to recent yen volatility.

As of 0200 GMT Thursday, the dollar rose 0.13% to 142.55 yen, recovering from a low of 140.71 recorded after Nakagawa's remarks. This recovery could potentially retrace towards 145.50, said IG analyst Tony Sycamore. The pair's movement often mirrors U.S. long-term Treasury yields, which rebounded robustly after hitting a 15-month low on Wednesday.

The U.S. consumer price index (CPI) saw a 0.2% rise last month, mirroring July's figures. Excluding volatile components like food and energy, the CPI climbed 0.3%, up from the previous month's 0.2% increase. This influenced traders to largely dismiss the likelihood of a 50-basis point (bp) rate cut on Sept. 18, setting current odds at 15% versus 85% for a 25-bp reduction.

For the ECB, markets are almost fully betting on a quarter-point cut on Wednesday, with several policymakers advocating for it following June's reduction. The euro held steady at $1.1009, near its lowest since Aug. 16. Meanwhile, sterling and the Swiss franc faced minor declines against the dollar.

(With inputs from agencies.)