Dollar rebounds as Powell commits to fighting inflation

The dollar index gained on Friday after Federal Reserve Chair Jerome Powell adopted a hawkish tone to battling inflation, but did not settle the debate on how large a rate increase is likely at the U.S. central bank’s September meeting.

The U.S. economy will need tight monetary policy “for some time” before inflation is under control, which means slower growth, a weaker job market and “some pain” for households and businesses, Powell said on Friday in remarks that warned there is no quick cure for fast rising prices.

“The hope of a dovish pivot was squashed, at least for now. Powell needs to see more than just one month of improving inflation data and he made it clear that continued tightening is the path he will take,” said Ryan Detrick, chief market strategist at Carson Group.

Powell gave no indication of how high interest rates might rise before the Fed is finished, only that they will move as high as needed as it seeks to bring down inflation to its 2% target.

“I think overall the Fed chairman was really hawkish, but not above and beyond what had been priced in and I think the jury is still out on whether or not we see a 50 or 75 basis point rate hike next month,” said Joe Manimbo, senior market analyst at Convera in Washington.

Jobs and inflation data for August that will be released before the Fed’s Sept. 20-21 meeting will now be key to the size of the Fed’s next rate increase, Manimbo added.

The dollar index rose to 108.78, up 0.30% on the day, after earlier falling as low as 107.54. It is down from a five-week high of 109.27 on Tuesday and is holding below a 20-year high of 109.29 reached on July 14.

The euro dipped 0.07% to $0.9963. It has bounced from a 20-year low of $0.99005 on Tuesday. The dollar also gained 0.66% against the Japanese yen to 137.39.

The dollar dropped earlier on Friday after data showed that U.S. consumer spending barely rose in July as a drop in gasoline prices weighed on receipts at service stations, and that monthly inflation slowed down considerably.

Other data on Friday showed that U.S. consumer sentiment improved further in August and households’ near-term inflation expectations fell to an eight-month low.

Atlanta Fed President Raphael Bostic said on Friday that with data showing U.S. inflation is slowing, he is “leaning” toward supporting a 50 basis point rate hike in September on the way toward getting the policy rate to 3.5% to 3.75% by year end.

Fed funds futures traders are pricing in a 60% chance of a Fed rate hike of another 75 basis points at its September meeting, compared with 45% before Powell’s comments, and a 40% probability of a 50 basis points increase.

The euro briefly hit a session high against the greenback earlier on Friday after Reuters reported that some European Central Bank policymakers want to discuss a 75 basis points interest rate hike at the September policy meeting, even if recession risks loom, as the inflation outlook is deteriorating.

Klaas Knot, a member of the European Central Bank’s governing council, said in an interview with Dutch national broadcaster NOS on Friday that he favours large interest rate hikes to tame inflation.

Sterling also slipped after a regulator said that British energy bills will jump 80% to an average of 3,549 pounds ($4,188) a year from October, plunging millions of households into fuel poverty and businesses into jeopardy unless the government steps in.

The British pound fell 0.80% to $1.1742.