Dollar struggles to gain ahead of US inflation data, yen extends rally

US Treasury announces $6bn buyback operation

The US dollar traded mixed on Wednesday, slipping somewhat against the euro, the pound, the yen and the aussie, and slightly gaining versus the franc, kiwi and loonie. Today, the greenback continues to trade quietly, giving back some of yesterday’s gains against the franc and the kiwi.

Even the US Treasury’s announcement about a $6bn buyback operation later today – announced yesterday – was not enough to shake the dollar, though yields rose, reflecting disappointment among bond investors, as there has been heightened speculation for at a least $10bn buyback.

US PPI and CPI inflation data enter the spotlight

Perhaps dollar traders refrained from entering large positions ahead of today’s US PPI data for August, and tomorrow’s CPI inflation numbers for the same month. The cautious market approach ahead of the data is also visible in the Fed funds futures market, where the probability of a September rate hike remained at around 60%, with participants fully penciling in two quarter-point rate increases by March 2027.

Hotter-than-expected PPI data today could heighten anxiety about a similar CPI report tomorrow, eventually allowing investors to ramp up their rate hike bets and thereby add some fuel to the dollar’s engines.

Yen flexes muscles amid BoJ hike bets and intervention fears

Nonetheless, even if this is the case, the dollar may find it extremely difficult to reverse the tide against the Japanese yen. After briefly emerging above 160.00, dollar/yen collapsed, falling as much as 4.7%. A sudden spike near that zone raised suspicions about new rate checks by Tokyo and/or Washington, increasing fears of another intervention soon, while hawkish remarks by BoJ officials, including Governor Ueda, further encouraged yen buying.

The narrative that the BoJ cannot become more hawkish than it currently is has also collapsed. That view was based on PM Takaichi’s dovish fiscal stance, her calls for the BoJ to keep interest rates low, and her ability to influence monetary policy through her Board appointments. However, an economic adviser to Takaichi recently said that he now expects the BoJ to raise interest rates in September and to proceed with more hikes thereafter.

The cocktail of all these recent developments keeps the door open to further yen gains. Should dollar/yen break below the 152.50 zone, the downfall may target the round figure of 150.00.

ECB rate decision on tap

As for euro traders, today they will keep their gaze locked on the ECB policy decision, where a 25bps rate increase is a done deal according to Eurozone’s money markets. Thus, a quarter-point on its own is unlikely to tempt euro bulls. For that to happen, President Lagarde and her colleagues may need to once again highlight the upside risks to inflation and keep the door wide open to more hikes.

This could take euro/dollar above 1.1650, setting the stage for bullish extensions towards the highs of June 20 and 21, at around 1.1710.

Risk aversion prevails as Middle East hostilities continue

On Wall Street, all three of its main indices closed in the red, with the Dow Jones losing the most ground. Besides the rise in yields amid yesterday’s announcement about the Treasury buybacks, the ongoing hostilities in the Middle East may have also weighed on risk appetite.

The US attacked multiple Iranian oil tankers, with Iran launching retaliatory attacks on a US base in Jordan, while Houthis in Yemen attacked several Saudi Arabian cities.

All this heightening tension exerted more upside pressure on oil prices, thereby increasing the inflation risks. Today, stock futures are slightly higher, but upside surprises in the US PPI and CPI data could further add to inflation risks, thereby weighing on stocks.

Strangely, the rising yields and soaring oil prices did not prevent gold from rebounding. The precious metal found support near the $4,340 zone on Wednesday and climbed to hit resistance at around $4,435. Today, the precious metal is pulling back, reflecting traders' unwillingness to take it higher amid the risk of hot inflation numbers today and tomorrow.