Dollar anchors near one-week highs as sticky PCE keeps hawkish Fed bets alive

The U.S. dollar reached near its highest levels in a week on Thursday, as strong economic data bolstered expectations that the Federal Reserve would maintain its high policy stance. The Dollar Spot Index remained stable at 99.17 following a 0.3% surge in the previous trading session. Persistent inflation concerns kept money markets from pricing in aggressive monetary easing, while fiscal drag from increasing Treasury debt limited the dollar's potential gains.

Currency pairs remained volatile, waiting for new policy signals. The July Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation indicator, rose by 3.7% year-on-year, meeting June's growth rate and surpassing Wall Street projections of 3.6%. On a monthly basis, prices increased by 0.2%, outpacing expectations for a 0.1% rise.

While the core PCE remained in line with expectations at 3.3% year-on-year, the persistent headline inflation suggested that cost pressures were still present. Futures markets priced in a 60% chance of another 25-basis-point Federal Reserve rate hike before the year's end, holding down Treasury yields and discouraging short-sellers from pushing the dollar down.

The South Korean Won gained 0.3% to 1,381, as the Bank of Korea raised its benchmark rate to 3.00% for the second consecutive hike and projected a 3.3% growth for 2026. The Euro slipped near a one-week low around $1.1600, despite remarks from ECB Executive Board member Isabel Schnabel that Eurozone borrowing costs needed to rise further.

The Australian Dollar remained close to its peak since early June at $0.7180, supported by a strong July domestic CPI print, which prompted money markets to bet on a fourth interest rate hike for 2026. The Japanese Yen stayed flat at 159.36 per dollar, with BOJ Deputy Governor Ryozo Himino hinting at potential September intervention to curb inflation, keeping the yen below last month's intervention levels.

With the PCE report analyzed, foreign exchange traders are focusing on the upcoming Jackson Hole Economic Policy Symposium, where Federal Reserve Chair Kevin Warsh will deliver his first keynote speech on Friday. FX traders will scrutinize his comments for clues on whether central bankers will prioritize economic growth cooling or another rate hike to tackle persistent inflation.