US Dollar Rises as PCE Data Fuels Rate Hike Bets

The US dollar experienced its largest gain in nearly four weeks on August 26 after July personal consumption expenditures (PCE) data showed inflation rising at a 3.7% annual pace. This figure exceeded economist expectations of 3.3% for core PCE, pushing the odds of a Federal Reserve interest rate hike next month to approximately 40%.

The rally recovered about half of the losses triggered by a surprise initiative from Treasury Secretary Scott Bessent to increase government-bond purchases in an effort to lower long-term interest rates. While the dollar advanced against most Group of 10 currencies, including the yen and Swiss franc, gains were tempered by data showing flat inflation-adjusted consumer spending for July.

In other currency markets, the Australian dollar hit a three-month high of US$0.71865 following a rise in trimmed mean CPI to 3.6%, which increased expectations for a Reserve Bank of Australia rate hike. Meanwhile, the US dollar gained against the Canadian dollar after the Treasury Board of Canada implemented retaliatory tariffs on US$20 billion of annual US imports following the collapse of trade talks.

Investors are now awaiting a keynote speech by Federal Reserve Chairman Kevin Warsh at the Jackson Hole symposium for further guidance on whether additional rate hikes are necessary to reach the 2 per cent inflation target.