Dollar Strengthens as Hot PPI Data Fuels Fed Rate Hike Expectations

The U.S. dollar advanced on Thursday after a key inflation report came in hotter than anticipated, bolstering expectations that the Federal Reserve will raise interest rates at its upcoming meeting. The move pressured other major currencies, with the euro slipping after a European Central Bank rate hike and the Japanese yen's recent rally stalling.

US Inflation and Fed Expectations

The primary driver for currency markets was the August U.S. producer price index (PPI) report. According to the Bureau of Labor Statistics, headline PPI rose 5.4% year-over-year, slightly above the consensus estimate of 5.3%. The monthly increase was 0.4%, in line with expectations.

This data, combined with a recent strong jobs report and surging oil prices, points to persistent inflationary pressures that could force the Fed to maintain its hawkish monetary policy. Following the report, the probability of a quarter-point rate hike at the Fed's September 16 meeting jumped to 73%, up from about 64% before the data, according to the CME FedWatch tool.

The reaction in the bond market was swift, as higher rate expectations typically weigh on bond prices. The benchmark 10-year Treasury yield climbed 11.8 basis points to 4.955%, while the more rate-sensitive 2-year yield added 12.9 basis points to 4.556%. The U.S. Dollar Index, which measures the greenback against a basket of peers, rose 0.2% to 99.03.

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Euro and Yen Diverge

Across the Atlantic, the euro weakened even as the European Central Bank (ECB) delivered an expected 25 basis point rate hike. In a statement, the ECB cited ongoing inflation pressures and warned that price growth was set to remain well above its 2% target "for an extended period." The euro last traded down 0.1% at $1.1614.

In Asia, the Japanese yen's powerful rally paused. The USD/JPY pair, a measure of the dollar's strength against the yen, rose 0.6% to 154.34. The yen remains near a seven-month high, however, as traders widely anticipate that the Bank of Japan (BoJ) will deliver its own 25 basis point rate hike on September 18 to combat elevated inflation.