By Jaspreet Kalra and Laura Matthews
NEW YORK/SINGAPORE (Reuters) -The dollar fell against the euro and Swiss franc on Friday, on course for a 2% decline in August against a basket of currencies, as traders prepared for a U.S. interest rate cut by the Federal Reserve next month.
The dollar initially firmed after U.S. inflation data came in as expected, but later gave up those gains.
The U.S. Commerce Department reported on Friday that its Personal Consumption Expenditures (PCE) Price Index rose 0.2% last month after an unrevised 0.3% rise in June.
That keeps the Fed on track for a widely expected rate cut at its next meeting on September 16-17. Money markets are pricing in an 87% chance of an easing, up from 63% a month earlier, CME’s FedWatch tool showed.
The dollar index, which measures the greenback against a basket of currencies, was last down 0.14% at 97.760.
Weak consumer sentiment continues to hang over an anxious market, which is rebalancing and hedging portfolios at month’s end after U.S. equities rallied throughout August, said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
Moreover, U.S. President Donald Trump’s campaign to exert more influence over monetary policy, including this week’s attempt to fire Fed Governor Lisa Cook, has weighed on the dollar.
A federal judge said on Friday she would set an expedited briefing schedule in Cook’s bid to temporarily block Trump from firing her while she pursues a lawsuit that says he has no valid reason to remove her.
“Market instability remains in focus, further fueled by media coverage surrounding Fed Governor Cook’s hearing regarding her contested dismissal,” Shinohara said.
Trump is trying to reshape the Fed after repeatedly criticising the central bank and its Chair Jerome Powell for not cutting interest rates.
Fed Governor Christopher Waller said on Thursday he wanted to start cutting rates next month and “fully expects” more rate cuts to follow to bring the central bank’s policy rate closer to a neutral setting.
With the Fed’s preferred inflation measure accelerating as expected, it makes “it more difficult to justify an aggressive course of rate cuts beyond September’s widely anticipated move,” said Karl Schamotta, chief market strategist at Corpay in a note.
EU INFLATION
Euro zone consumers kept their inflation expectations mostly stable at or above the European Central Bank’s 2% target in July, according to an ECB poll released on Friday.
Data released on Friday also showed French consumer prices rose slightly less than anticipated in August while Spain’s European Union-harmonised 12-month inflation rate was steady at 2.7%.
The euro was up 0.12% at $1.1699 and sterling was flat at $1.3511. Against the yen, the dollar softened 0.09% to 146.83 yen.
Against the Swiss franc, the dollar weakened 0.24% to 0.7999.
Among other currencies, the New Zealand dollar was slightly stronger after Reserve Bank of New Zealand Chairman Neil Quigley tendered his resignation, citing the fallout over the handling of the sudden resignation of the central bank’s governor earlier this year.
China’s yuan hit its strongest level in 10 months against the dollar as steady central bank fixings and a hot domestic stock market drive the currency higher, while the Indian rupee dropped to a record low, weighed down by worries about the economic impact of steep U.S. tariffs on Indian imports.
(Reporting by Jaspreet Kalra and Laura Matthews; Editing by Shri Navaratnam, Jamie Freed, Alison Williams and Richard Chang)
