The U.S. dollar index (DXY00) gained 0.06% on Friday as a hotter-than-expected core CPI reading increased expectations that the Federal Reserve will raise rates at next week’s meeting. Market pricing put the probability of a 25-basis-point FOMC increase at 88%, up from 75% on Thursday. The 10-year Treasury yield also climbed 0.6 basis point, strengthening the dollar’s interest-rate advantage.
Oil prices initially pulled the 10-year yield lower despite the CPI release. However, inflation data dominated by the end of the day, and the yield finished slightly higher.
U.S. CPI rose 0.4% month over month in August, matching market expectations. Core CPI advanced 0.3%, above the anticipated 0.2%. On a year-over-year basis, headline CPI remained at 3.4%, in line with forecasts. Core CPI eased to 2.4% from 2.5% in July, reaching its lowest level in 5.5 years and matching expectations.
The report led traders to raise the probability of a 25-basis-point FOMC rate increase at the September 15-16 meeting to 88%, from 75% on Thursday.
The dollar’s gains were tempered by weaker-than-expected U.S. consumer sentiment. The University of Michigan’s preliminary September consumer sentiment index fell 3.9 points to 47.8, compared with expectations for a 0.6-point decline to 51.3.
October WTI crude oil prices (CLV26) dropped 2.4% on Friday, reversing part of Thursday’s 6.7% surge to a 3.5-month high. Crude nevertheless gained 9.4% for the week. Prices retreated after the International Energy Agency warned that high oil prices and constrained supply would drive the largest decline in global demand this year since the Covid-19 pandemic.
EUR/USD (^EURUSD) declined 0.14%, pressured by the stronger dollar. A 9% weekly increase in oil prices had weighed on the euro, particularly because the Eurozone economy is highly dependent on imported energy. The ECB’s interest-rate increase on Thursday provided support by improving the euro’s interest-rate differential, while a higher 2026 Eurozone GDP forecast offered additional fundamental support.
Markets currently see a 78% chance of a 25-basis-point ECB rate increase at its October 29 policy meeting. As expected, the ECB raised its deposit facility rate by 25 basis points to 2.50% and said inflation would remain above 2% for an “extended period.”
USD/JPY (^USDJPY) fell 0.46%. The yen benefited from Friday’s oil-price decline, although the currency remained under pressure from crude’s 9% weekly gain. Japan imports more than 90% of its energy, making higher oil costs particularly consequential for its economy.
The yen also retained support from comments made Thursday by BOJ Board member Kazuyuki Masu. He said, “The BOJ will continue to raise the policy interest rate,” citing a price trend close to 2% and accommodative financial conditions. He added, “If inflation accelerates here, there is a risk that the BOJ might inevitably need to implement a rapid policy interest rate hike.”
The yen also received support from Tuesday’s remarks by Japan’s health minister, who oversees the Government Pension Investment Fund, or GPIF, with $2.1 trillion in assets. He said the fund was still considering whether its asset allocation required review. The recent surge in the 10-year Japanese government bond yield to a 30-year high has fueled speculation that the GPIF could increase its allocation to JGBs, potentially supporting the yen.
Expectations of a BOJ rate increase later this month continue to underpin the yen. Markets assign a 96% probability to a 25-basis-point hike at the September 18 policy meeting. The government favors an increase to support the currency and curb inflationary pressures arising from its weakness. Recent coordinated U.S.-Japan intervention and concerns about further action provide additional support if the yen remains weak.
December COMEX gold (GCZ26) closed Friday up $1.60, or 0.04%, while December COMEX silver (SIZ26) gained $0.261, or 0.40%.
Precious metals finished higher despite headwinds from a stronger dollar and rising 10-year Treasury yields. A slightly hotter-than-expected core inflation report and increased odds of a Fed rate hike also weighed on prices.
Fund positioning remains supportive. Long-term holdings in gold ETFs reached a 5.75-month high the previous Thursday, while silver ETF holdings rose to a 5.5-month high on August 25.
Central-bank demand continues to support gold. On August 7, China reported that bullion held in PBOC reserves increased by 640,000 troy ounces in July to 76.08 million ounces, marking the central bank’s 21st consecutive month of reserve additions.
