Dollar Flat at 99.85 as Cooling CPI Meets Safe-Haven Demand

The US Dollar Index closed at 99.8460, up a scant 0.03% on the day — essentially flat. The move followed Wednesday's July CPI report, where headline inflation eased to 3.4% y/y from 3.5% in June and core cooled to 2.5% y/y, the softest since March 2021. Because the live 2026 policy question is whether the Fed hikes rather than cuts, softer inflation should argue for less tightening: per CME FedWatch, odds of a hold at the 15-16 September FOMC meeting rose to about 62%, from roughly 52% a day earlier, while 25bp hike odds eased to about 38%. Offsetting that pull lower, safe-haven dollar demand tied to the ongoing US/Israel-Iran conflict kept DXY pinned rather than falling.

Treasury yields fell across the curve: the 10-year eased 3.7bp to 4.645%, the 5-year fell 5.3bp to 4.322% — the largest move of the tenors — the 30-year slipped 3.0bp to 5.217%, and the 3-month was little changed, down 0.4bp to 3.703%. The Fed funds target remains 3.50-3.75%, with markets still debating a hike rather than a cut. Commentary was mixed: a Reuters headline quoted Hammack saying the Fed should raise rates to restrain growth and inflation, while Nuveen said the Fed has room to stay patient on rates. Another headline noted Asia stocks rising as the US inflation data dented Fed hike bets.

EUR/USD traded at 1.1528 (+0.03%), pinned near 1.1500 as it consolidates the dollar losses booked after Wednesday's CPI print, with no fresh catalyst until Friday's eurozone data. GBP/USD eased to 1.3482 (-0.10%) even after UK data beat forecasts — June GDP rose 0.3% m/m versus a flat forecast and Q2 GDP grew 0.4% q/q — with the pair capped below the 1.3540-1. USD/JPY ticked up to 159.52 (+0.06%), consolidating just under the 160 intervention-watch level. USD/CAD held near 1.3936 (-0.02%) in a narrow range, with falling oil prices offsetting broad dollar softness.

USD/JPY rose only slightly to 159.52 (+0.06%), a muted move given the headline backdrop. Bloomberg reported that Prime Minister Sanae Takaichi's government now supports a near-term BoJ rate hike in September or October, citing a roughly 74% chance of a September move; a separate Reuters analysis put September-hike odds at 76%, up from 24% on 30 July, per Tokyo Tanshi data. That should favor the yen, but gains from the late-July/early-August US-Japan joint yen-buying intervention — a rally of roughly 5% — appear to be fading, with the extent of any retracement unconfirmed. Also in the mix: a reported rift between US Treasury Secretary Scott Bessent, who favors faster BoJ tightening, and Takaichi, who is wary of moving too fast, a split flagged as risking the joint yen-rescue effort. No Japan data is confirmed on today's calendar; watch for MoF/Mimura commentary and further Bessent-Takaichi headlines.

Eurozone data dominates the docket: German WPI m/m, French final CPI m/m, and Eurostat's second flash estimate of Q2 GDP and employment change, plus the euro-area trade balance. China releases foreign direct investment data, M2 money supply (forecast 7.9% y/y versus 8.0% prior) and new loans. Canada publishes manufacturing sales and wholesale sales. The US session brings core retail sales m/m (forecast 0.2% versus -0.2% previous) and headline retail sales m/m (forecast 0.1% versus 0.2% previous), followed by the preliminary University of Michigan consumer sentiment reading (forecast 54.7 versus 54.4 prior) and inflation expectations (previous 4.2%), plus business inventories.