Dollar Stabilizes Following CPI-Induced Slide, Yen Volatility Sparks Intervention Speculation

The U.S. dollar found its footing on Friday after a sharp decline to a one-month low, triggered by softer-than-expected inflation data that fueled expectations of a September rate cut by the Federal Reserve. However, the broader foreign exchange markets remained cautious due to volatility in the Japanese yen, which strengthened sharply late Thursday, raising speculation of government intervention.

Key Points:

• Dollar Recovers from Lows: The dollar index and dollar index futures steadied after dropping to a one-month low in overnight trading due to weaker-than-expected U.S. CPI data. The soft inflation figures have increased bets on a September rate cut, with the probability now at 83.4%, up from 64.7% last week.
• Yen Volatility and Intervention Concerns: The Japanese yen experienced volatility, with the USDJPY pair rebounding slightly after a 2% drop on Thursday following the weak U.S. CPI report. The sharp decline from a near 38-year high sparked speculation of Japanese government intervention in currency markets. While officials haven’t provided clear confirmation, increased scrutiny is expected on the Bank of Japan’s balance sheet data later in July to determine any intervention.
• Euro and Pound Flat: The euro and British pound remained mostly unchanged against the dollar, with the euro slightly below its one-month high reached on Monday. Concerns about a political deadlock in France and weaker-than-expected German wholesale price index inflation data contributed to the euro’s muted performance.

Overall, the dollar’s recovery from its recent lows indicates a degree of stabilization in the currency markets. However, the volatility in the yen and ongoing speculation of government intervention continue to create uncertainty. Market participants are now eagerly awaiting further clues from Federal Reserve officials and upcoming economic data to gauge the central bank’s monetary policy path.