The U.S. dollar index fell on the day after data pointed to easing inflation, trimming expectations for an October Federal Reserve rate hike. The index was down about 0.17%, while investors also weighed a mixed macro backdrop—stronger parts of the growth picture against softer inflation gauges.
Moves in foreign exchange extended beyond the dollar, with the euro firming and the yen gaining ground. In commodities, crude oil rose, a development that investors said could keep inflation risks in focus—an important counterweight to the softer price data.
Key takeaways
- Dollar index lower: The dollar index dropped around 0.17% as inflation indicators came in weaker than expected.
- Central bank expectations shifted: Market-implied odds for an October Fed rate hike fell to about 35% from 52% on Tuesday.
- Euro supported by both growth and policy: EUR/USD rose roughly 0.19% as Germany’s inflation print strengthened and oil’s rise added hawkish inflation risk for the ECB.
- Yen firms on U.S. inflation: USD/JPY slipped about 0.27% as lower-than-expected U.S. inflation reduced the probability of Fed tightening.
- Gold up on dollar softness: Gold futures rose alongside a weaker dollar, though higher crude oil and yields acted as headwinds.
What drove the dollar move
Investors attributed the dollar’s weakness primarily to inflation data tied to the Fed’s preferred measure. The August core PCE price index rose 0.2% month over month and 3.0% year over year, both coming in below expectations of 0.3% m/m and 3.3% y/y. That softness reduced the likelihood investors assign to additional Fed tightening next month.
Additional inflation-linked reporting reinforced the message. The market also considered results from the broader inflation complex, including revisions to second-quarter demand and inflation measures. The Q2 core PCE price index was revised down to 3.3% from 3.6%, while overall economic growth was revised higher.
Growth signals and crude oil kept investors cautious
While inflation data weighed on the dollar, other releases suggested the U.S. economy remained resilient. Second-quarter GDP was revised upward to 2.2% (quarter over quarter, annualized), and the report said personal consumption was revised higher as well. Labor and activity indicators added to that mix: ADP employment for September rose by 90,000, beating an expectation of 75,000, and the MNI Chicago PMI rose to 58.8 from 51.0, the fastest pace of expansion in four months.
Personal spending also came in firm. August personal spending increased 0.9% month over month, matching expectations and marking the largest rise in five months. At the same time, crude oil rose about 1%, which investors noted could lift inflation expectations and partially offset the dollar-negative impact of softer PCE readings.
FX moves: euro supported, yen gains tempered
EUR/USD rose about 0.19%, with dollar weakness acting as a direct tailwind. The euro’s gains were also supported by European inflation and pricing signals. German September CPI (harmonized) rose 0.6% month over month and 3.3% year over year, both ahead of expectations. Investors viewed the stronger inflation profile as potentially hawkish for European Central Bank policy.
Oil’s rise added another layer to the euro narrative by increasing inflation risk. The data also came alongside weaker labor signals in Germany: the September unemployment change rose by 12,000 versus an expectation of 500.
In Japan, USD/JPY fell about 0.27%. Traders pointed to the same U.S. inflation developments as the key driver—softer U.S. price data lowered the perceived need for an October Fed hike, pressuring the dollar. Lower U.S. Treasury yields also supported the yen.
Support for the yen also reflected carry-related positioning tied to prior remarks from Japanese officials. However, gains were described as limited by weaker-than-expected Japanese economic prints. Japan’s August industrial production fell 1.7% month over month, and August retail sales declined 1.2% month over month, both weaker than forecasts. The day’s roughly 1% increase in crude was also a headwind for Japan given the country’s reliance on imported energy.
Gold and silver: dollar softer, oil and yields a counterweight
Precious metals advanced as the dollar weakened. December COMEX gold was up around 0.59% and December COMEX silver was slightly higher. Market participants cited supportive factors including easier-than-expected U.S. inflation data, which reduced the probability of near-term Fed tightening.
Investors also pointed to higher demand themes. Gold was supported by ongoing central-bank accumulation, including news that China’s central bank increased bullion reserves. According to the report, the PBOC added 650,000 ounces of gold to reserves in August, lifting holdings to 76.73 million troy ounces—the largest monthly increase in three years and the 22nd consecutive month of additions.
Still, not all factors were bullish. Higher crude oil—up about 1%—was described as raising inflation expectations, which can weigh on precious metals if it pushes central banks toward tighter policy. Stronger German inflation prints were also viewed as potentially hawkish for the ECB. Additionally, higher Treasury yields were cited as a drag on metal prices.
What to watch next
With Fed expectations already shifting on today’s inflation data, investors will likely focus next on additional U.S. price and labor indicators, as well as market pricing for upcoming central bank meetings. The balance between falling inflation prints and oil-driven inflation risk remains central, and could determine whether the dollar’s decline sustains or reverses into the next round of macro releases.
