Dollar down after soft PCE, but still on track for best month since June

The U.S. dollar edged lower on Wednesday, pulling back from near two-month highs after core personal consumption expenditures price index, rose at a slower-than-anticipated rate in August.

The dollar index, which tracks the greenback against a basket of six rival currencies, fell 0.3% to 100.845.

According to data from the Bureau of Economic Analysis on Wednesday, the core PCE measure climbed 0.2% month-on-month, compared to 0.1% in July and expectations for growth of 0.3%.

In the twelve months to August, the measure stood at 3.0%, matching July’s rate of 3.0% and also cooler than projections.

Despite the minor pullback, the dollar remains on track for a 2% advance against the yen in September and its strongest overall monthly performance since June, underpinned by surging Treasury yields and persistent geopolitical tension in energy markets.

Market expectations for an October Fed rate hike eased after New York Fed President John Williams stated there was "no need for urgency" to raise borrowing costs further.

Money markets subsequently recalibrated the probability of an October rate increase down to roughly 50%, from above 70% earlier in the week, easing upside momentum for the greenback ahead of the August U.S. Personal Consumption Expenditures (PCE) price index release.

Yen outperforms G10 rivals amid escalating intervention warnings

The Japanese yen mounted a firm rebound, rising 0.3% to 156.77 per dollar and outperforming all Group-of-Ten peers as traders treaded cautiously around official intervention risks.

The currency’s advance followed fresh warnings from Japan’s top currency diplomat Atsushi Mimura, who reiterated that Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama - in coordination with Washington - had delivered a explicit warning against disorderly yen weakness.

While weaker-than-expected August Japanese retail sales and a surprise contraction in industrial output highlighted domestic economic fragility, minutes from the Bank of Japan’s July meeting confirmed that policymakers see underlying inflation approaching their 2% target, reinforcing expectations for ultimate policy normalization despite near-term volatility.

Aussie dollar sinks to nine-week low after soft inflation print

The Australian dollar traded under heavy selling pressure, dropping 0.3% to $0.6900 and breaking below the $0.7000 threshold to touch its lowest level in nine weeks.

The Aussie’s slide came as monthly Australian CPI data undershot consensus forecasts, tempering market expectations for additional near-term tightening from the Reserve Bank of Australia.

The softer inflation reading arrived just one day after the RBA delivered a widely anticipated 25-basis-point increase to its cash rate, bringing it to a 15-year peak of 4.60%.

Because markets had already fully priced in Tuesday’s RBA rate increase, the currency proved unable to withstand the narrowing rate differential against elevated U.S. yields, leaving the Aussie vulnerable to broad-based risk aversion across regional currency markets.

Euro pauses as attention shifts to U.S. inflation catalyst

The euro edged 0.1% higher to $1.1354, trading in a narrow range as institutional desks refrained from taking large directional bets ahead of the Fed’s preferred inflation metric.

Across Asia-Pacific currency bourses, the offshore Chinese yuan held steady around 6.71 per dollar after official PMI figures showed China’s manufacturing sector returned to growth territory in September at 50.1.

The yuan remains on track for its seventh consecutive quarterly gain against the greenback as markets turn toward Friday’s U.S. nonfarm payrolls report for the next major impulse in global currency pricing.