Dollar Reaches Highest Since July as U.S. CPI Exceeds Forecast

U.S. Consumer Prices Top Projections in August
  • Consumer price data add to scope for Fed to tighten policy
  • Traders prepare for central bank meetings in U.S., Japan

A gauge of the dollar rose to its highest level since July after a report showed U.S. inflation ticked up more than forecast.

The U.S. currency strengthened against most of its Group-of-10 peers as the pace of consumer prices in August suggests inflation is moving closer to the Federal Reserve’s 2 percent goal. The U.S. central bank is set to hold a policy meeting on Sept. 20-21, with Bank of Japan officials scheduled to gather during the same two days.

"Finally, a good number for the dollar," said David Kohl, Julius Baer’s Frankfurt-based head of foreign-exchange research, commenting on the rising inflation figures. "The dollar story is related to what the Fed may do next week. People are increasingly looking at the data. When you want to construct a case for rate hikes, you go to" inflation.

Julius Baer forecasts the dollar will strengthen to 106 yen by year end.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major peers, rose 0.7 percent as of 5 p.m. New York time. It reached its highest level since July 28. The dollar strengthened 0.8 percent to $1.1155 per euro and added 0.2 percent to 102.29 yen.

The consumer-price index climbed 0.2 percent last month after being little changed in July. Core CPI excluding volatile food and fuel costs increased 2.3 percent from August 2015, after rising 2.2 percent in the prior 12-month period.

Futures show a 54 percent chance the Fed will raise rates this year, according to data compiled by Bloomberg, based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase. That’s down from a recent high of 65 percent on Aug. 26, after Chair Janet Yellen said the case for tightening had “strengthened.”

"The major dollar-crosses strengthened a bit, but I think at the end of the day, we are just looking at the major event risk next week on the Fed and BOJ," said Mazen Issa, a senior foreign-exchange strategist at Toronto-Dominion Bank in New York. "I don’t think we are there yet to affect the Fed moving and our official call is in December."

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