Dollar Index Climbs to 99.13 as Fed Hike Odds Spike to 87%

The US Dollar Index gained 0.1% to reach 99.13 at 19:12 GMT. This move came after the release of August consumer price data. The report increased expectations for a Federal Reserve rate hike next week. Traders shifted focus from Treasury yields to the immediate impact of inflation figures.

Asian currencies weakened as the yen slipped against the dollar. The dollar held near its weekly high despite minor fluctuations. Market sentiment tightened following the inflation report. The greenback remained the strongest major currency in the session.

Inflation data boosts rate hike probability

Headline CPI rose 0.4% month-over-month in August. Core CPI increased 0.3% compared to the 0.2% consensus. Year-over-year headline inflation stayed at 3.4%. Core annual inflation moderated to 2.4% from 2.5%. These figures matched market expectations for annual rates.

The CME FedWatch tool showed a surge in hike odds. The probability of a 25 basis point increase jumped to 87%. This was up from 69% before the data release. Higher rates typically strengthen the dollar. The Fed tracks PCE as its preferred gauge, which has been above the 2% target for 65 months.

Bond yields rise after CPI release

The 10-year Treasury yield increased 3.2 basis points to 4.976%. The 2-year yield advanced 8.8 basis points to 4.638%. Bond prices fell following the inflation report. The 30-year yield had reached a nearly two-decade high earlier in the week. Treasury buybacks did not prevent the recent slump in bonds.

Hawkish expectations have grown since the July rate decision. Three regional Fed presidents dissented in July. Fed Chair Kevin Warsh delivered a hawkish speech at Jackson Hole. Nonfarm payrolls and producer price data supported the tightening view. Oil price increases added to inflationary pressures.

Yen strength faces dollar resistance

The Japanese yen strengthened against the dollar on Friday. It was set for a two-week positive run. This would be the first time since early May. Traders focused on the interplay between Treasury yields and yen movements. The dollar's strength limited the yen's gains this week.

GN markets/fx (en-US) reported the dollar held near its weekly high. The currency market reacted sharply to the CPI release. Economic indicators tipped the odds toward monetary tightening. The final straw for rate hike expectations was the August data. Analysts noted that a dovish surprise was needed for a hold.