Dollar treads water as Fed hike bets pared on benign US inflation

Tokyo, August 13 - The dollar's upward momentum paused on Thursday after U.S. inflation data revealed a calm picture, prompting traders to reduce expectations of an immediate Federal Reserve interest rate increase. The greenback held steady against the yen during Asian trading hours, but was poised to climb around 1% this week as markets rebounded the currency after a joint U.S.-Japan intervention that saw it hit a three-month low.

The dollar index, which tracks the U.S. currency against the yen and five other major currencies, stayed flat at 100 on Thursday, on track for a 0.4% weekly increase. U.S. consumer prices climbed by 0.1% in July, matching economists' forecasts, which led money markets to slash the probability of a September rate rise to 40%, down from 54% a week prior, according to CME Group's FedWatch.

Currency strategist Michael Wan of MUFG indicated the Fed's main challenge is balancing inflation concerns with a cooling job market, especially following the lower-than-anticipated July employment report released last Friday. Wan predicted the Federal Open Market Committee (FOMC) would likely keep a tight stance in September rather than signal a rate hike.

The dollar traded at 159.44 yen, near the 160 mark regarded as a critical threshold following the rare combined intervention at the end of July. This move contributed to the exchange rate falling from near a four-decade peak close to 164 to 155.20 over three days. Shusuke Yamada, head of Japan FX/rates research at Bank of America, stated that investors can only evaluate the authorities' dedication to supporting the yen through dollar-yen price movements and subsequent policy actions.

A breach above 160 would likely suggest limited policy resolve, while a successful intervention driving USD/JPY below 155 would bolster perceptions of strong commitment at least until recently, Yamada added. Trust in Japan's commitment to defending the yen improved after the coordinated intervention with the U.S. on July 31, but as USD/JPY rebounded without any intervention over the past week, that confidence seems to have diminished.

The euro remained unchanged at $1.1523. The British pound slipped 0.05% to $1.3489 ahead of a cascade of UK economic indicators later in the day, including GDP. The Australian dollar slipped 0.2% to $0.7049, still near its 10-week peak of $0.7091. Reserve Bank of Australia Assistant Governor Christopher Kent told a Reuters NEXT Newsmaker event in Sydney that inflation risks were primarily on the upside, and if they materialized, interest rates would need to rise again.

New Zealand's currency fell 0.4% to $0.5832, continuing its slow decline from the highest levels since early June reached earlier this month. Bitcoin remained flat around $63,532.