By Chuck Mikolajczak
NEW YORK (Reuters) – The U.S. dollar edged lower on Friday following two straight days of gains, after a reading on inflation was largely as anticipated by investors while consumer spending unexpectedly fell.
The Personal Consumption Expenditures (PCE) price index increased 0.3% in January, in line with expectations of economists polled by Reuters, after advancing by an unrevised 0.3% in December. In the 12 months through January, prices rose 2.5% after increasing 2.6% in December.
But consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.2% last month after an upwardly revised 0.8% increase in December.
“I have a suspicion that this is idiosyncratic on the spending side in January. At the same time, I wouldn’t be surprised if we get real weakness in February and March in view of the decline in consumer confidence,” said Thierry Wizman, global FX and rates strategist at Macquarie in New York.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.1% to 107.25, with the euro up 0.18% at $1.0416.
For the week, the dollar is up about 0.5% but down more than 1% for February, poised for its largest monthly decline since August.
Expectations the Federal Reserve will cut rates by at least 25 basis points (bps) at its June meeting edged up after the data, with markets pricing in a 71.4% chance of a cut, up from nearly 70% in the prior sessions, according to CME’s FedWatch Tool.
Fed officials have recently indicated they expect the central bank to hold rates steady until there is more clarity surrounding the impact of tariffs on inflation and a slowing economy.
The greenback had fallen earlier this week nearly 4% from a more than two-year high in January on renewed worries about U.S. economic growth and inflation as Trump shifted tariff deadlines on Canada and Mexico.
Investors are also bracing for the labor market impact from actions by the Department of Government Efficiency (DOGE) under Elon Musk.
“DOGE is important from the perspective that it creates a lot of nervousness… then you have the tariffs. And you remember, you’re going into this situation with not a very strong job security sentiment to begin with,” said Wizman.
On Thursday, Trump said his proposed tariffs of 25% on Mexican and Canadian goods would take effect on March 4, along with an extra 10% duty on Chinese imports, after some confusion over earlier in the week as to whether they would be held off until April.
The Canadian dollar strengthened 0.06% versus the greenback to C$1.44 while the Mexican peso was up 0.22% versus the dollar at 20.45.
Canada’s gross domestic product in the fourth quarter expanded by 2.6% on an annualized basis, surpassing widespread expectations for growth of 1.8%, as a jump in consumer spending, business investments and exports lifted growth.
Against the Japanese yen, the dollar strengthened 0.65% to 150.77 but has fallen nearly 3% for the month as investors largely expect the Bank of Japan to hike interest rates this year.
Sterling strengthened 0.06% to $1.2607. British international development minister Anneliese Dodds resigned on Friday in a surprise move triggered by Prime Minister Keir Starmer’s decision to slash the foreign aid budget in order to boost defense spending.
In cryptocurrencies, bitcoin fell 0.65% to $83,742.83 after falling $78,273.03, its lowest since November 10 as the risk asset has come under pressure from investor caution.
(Additional reporting by Rae Wee in Singapore; Editing by Clarence Fernandez, Stephen Coates, Alex Richardson and Andrew Heavens)
