Dollar set for second weekly gain amid US economic resilience

NEW YORK – The dollar fell but was still on course to notch a second straight week of gains against major peers on Friday after data continued to show US economic resilience, potentially complicating the Federal Reserve’s efforts to cut interest rates.

The dollar was down 0.21% to 149.48 against the Japanese yen, on track for a fifth consecutive week of gains and trading near its highest level since August 1.

The euro was up 0.31% to USD 1.1701. It was on course to finish the week lower, snapping three straight weeks of gains.

US DATA TAKES STEAM OUT OF FED RATE CUT PRICING

US consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6% in August, slightly higher than the 0.5% estimated by economists polled by Reuters.

The Personal Consumption Expenditures Price Index, which is the Fed’s preferred inflation measure, rose 0.3% last month, in line with expectations, US Commerce Department data showed.

“I think it’s pretty clear that stronger economic data has taken the steam out of the pricing for Fed rate cuts and that’s sort of narrowed the interest rate differential with other countries and pushed the dollar higher,” said John Velis, Americas FX and macro strategist at BNY in New York.

“We still think that hedging behavior is quite strong, so we still see lots of forward selling of dollars even while the US assets, particularly US equities, continue to gain influence from abroad, although that’s taken a little bit of a backseat this week as well to some degree. But I think it’s fairly clear that as Fed expectations go so will the dollar go in the short term,” Velis added.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.33% to 98.17. It was still on track for the second straight week of gains.

The two-year note yield, which typically moves in step with interest rate expectations for the Fed, fell 1.8 basis points to 3.645%.

Richmond Fed President Thomas Barkin said he sees limited risks of a big rise in either unemployment or inflation, letting the Fed balance its two goals as it debates further interest rate cuts.

Fed Vice-chair for Supervision Michelle Bowman said the central bank is close to achieving its 2% inflation target and that she believes decisive interest rate cuts are needed to ward off rising trouble in the job market.

Barkin and Bowman are the latest Fed officials to comment on the Fed’s decision last week to start cutting rates.

Traders are pricing in an 89.8% chance of a 25 basis-point rate cut at the Fed’s next meeting, down from nearly 92% probability a week ago, according to CME’s FedWatch tool.

“USD solidly back in range but less risk of disorderly unwind of shorts, based on positioning,” Bank of America analysts wrote in an investor note. “Pivotal jobs report ahead. Few near-term narratives to support the rest of G10.”

Data showed on Thursday that the US gross domestic product rose by an upwardly revised 3.8% from April through June, beating expectations.

The dollar was down 0.23% to 0.798 against the Swiss franc. It was still on track to finish the week higher, ending a run of six consecutive weeks of losses.

(Reporting by Chibuike Oguh; Editing by Mark Potter and Marguerita Choy)