On Friday, the US dollar (USD) declined against the yen following new data indicating a slowdown in inflation within the world’s largest economy. This strengthened market expectations that the Federal Reserve may begin reducing interest rates later this year. The US dollar has been strong against the yen, primarily driven by significant interest rate differences between the United States and Japan, recording a 14% increase over the year.
Earlier in the trading session, the dollar reached a 38-year peak at 161.27 yen. However, the easing inflation prompted a retreat, and by Friday, the dollar was down 0.3%, trading at 160.285 yen. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s favoured inflation gauge, showed no change last month. This follows a 0.3% increase in April. Over the past 12 months, the PCE price index rose by 2.6%, a slight decrease from the 2.7% rise in April.
Carol Schleif from BMO Family Office in Minneapolis commented, “Markets will breathe a sigh of relief that the PCE didn’t surprise one way or the other. It still indicates an economy coasting, hopefully to a more sustainable long-term pace, with inflation still bumping downward.”
Following this inflation report, the probability of the Fed easing monetary policy in September increased slightly, with Fed funds futures pricing in around a 67% chance, up from 65% the previous day, as per LSEG calculations. Additionally, the market anticipates one to two interest rate cuts of 25 basis points each this year.
The dollar/yen pair is particularly reactive to US economic data due to its strong correlation with US Treasury yields. This year, the US currency has seen gains of 1.9% monthly and 5.9% quarterly against the yen.
Meanwhile, the euro remained steady at $1.0701. Facing a 1.3% decline against the dollar in June, the euro is heading for its most significant monthly drop since January amid political uncertainties leading up to France’s general elections. The dollar also showed minimal change against the Swiss franc, maintaining a 0.8986 francs.
