Dollar strengthens, markets await PCE data for clues on the Fed

The U.S. dollar strengthened after a series of economic data showed better performance than expected. The market is now awaiting personal consumption expenditures data, or PCE, which is regarded as the Fed's main inflation gauge. The results of the data will determine the direction of U.S. monetary policy and have a significant impact on global markets.

This time the dollar's strength is not only the result of a momentary movement. The latest economic data indicate that the United States economy remains resilient despite rising global pressures. A change in market expectations regarding interest-rate policy has made the dollar's movements the main focus.

The American economy is stronger than expected.

The dollar's strength is rooted in the upward revision of the U.S. economic growth report. The U.S. Department of Commerce reported that GDP grew at an annualized rate of 3.8 percent in the second quarter, up from the initial estimate of 3.3 percent. This data shows that consumption and investment remain strong.

In addition, weekly unemployment claims were lower than the estimate, durable goods orders rose, and wholesale inventories were more robust than predicted. This composite of indicators provides evidence that the U.S. economy has not yet lost momentum.

GDP revision and its impact

The revision of GDP growth to the 3.8 percent level provides confidence that economic activity is not slowing significantly. Analysts assess that the household consumption sector and business investment still play a major role. This condition reduces the likelihood that the Fed will implement aggressive interest-rate cuts in the near term.

Earlier the market assessed that there was a high probability that the Fed would cut rates by as much as 50 basis points in December. However, after the growth data was released, that expectation fell to around 60 percent. This shift in sentiment strengthens the dollar in international markets.

Meanwhile, financial research institutions warn that the economy's resilience also brings the risk that inflation remains high. If consumer prices are slow to fall, The Fed could keep tight monetary policy longer.

Workforce Data and Goods Orders

Lower unemployment claims paint a picture that the U.S. labor market is still solid. A strong labor force often has an impact on stable consumption, thereby driving economic growth.

On the other hand, the rise in orders for durable goods indicates confidence among the business community. The company is still willing to invest despite global uncertainty. This indicator has also reinforced the view that the US economy has not yet entered a phase of sharp downturn.

Rising wholesale inventories also add to the positive signal. Rising inventories typically reflect businesspeople's confidence that demand will remain strong. These factors together dampen expectations for a massive rate cut by the Fed.

Focus on Switching to PCE data.

Although economic data provide a positive boost, the market is now awaiting the PCE report that will be released this weekend. PCE is the Fed's favorite inflation indicator because it reflects the real spending of American consumers.

Market projections expect PCE to rise 0.3 percent month-over-month and 2.7 percent year-over-year. This figure, if it is in line with or higher, will be the basis for the Fed to hold interest rates higher for longer.

The importance of the PCE index

Unlike the Consumer Price Index (CPI), the PCE is considered broader because it encompasses changes in consumer behavior. The Fed often uses the PCE as the primary benchmark to assess long-term inflation.

If the PCE report shows inflation remains high, the central bank is likely to delay cutting interest rates. This will support the dollar remaining strong in the short term. However, if inflation subsides, the possibility of an interest-rate cut could reopen.

Analysts from several major banks emphasize that PCE data have become a crucial test. Global investors are now holding back until the official report is released, so market volatility is expected to rise.

Market Expectations Going Forward

The evolving scenario is gradual interest rate cuts, not large cuts at once. An investor sees an opportunity for a 25 basis-point cut as more sensible than a drastic 50 basis-point move.

This expectation makes the market more cautious. The dollar's exchange rate against the euro and yen moved sharply, while the dollar index was approaching its best weekly performance in the past two months.

This condition has wide-ranging impacts, from commodity prices, capital flows to developing markets, to the exchange rates of currencies in Asia, including the rupiah.

Impact of the New Tariff Policy

In addition to inflation factors, U.S. trade policy also influences the movement of the dollar. The President of the United States has just announced a series of new import tariffs on a number of important products.

The aforementioned tariff covers brand-name drugs, heavy trucks, and even kitchen cabinets. This policy is seen as an effort to protect domestic industries, but it also risks increasing global trade tensions.

Import Tariffs and Market Reactions

A 100 percent tariff on brand-name drugs raises concerns in the international pharmaceutical sector. However, some European pharmaceutical companies are believed to be able to obtain an exemption if they manufacture in America.

A 25 percent tariff on heavy trucks has an impact on the global automotive industry, especially suppliers from Asia. Whereas the 50 percent tariff on kitchen cabinets targets the furniture manufacturing and construction sector.

Market reactions are relatively varied. European pharmaceutical stocks slipped slightly as the market priced in the possibility of exemptions. Meanwhile in the automotive sector, investors are more cautious in assessing the medium-term impact.

Implications of Global Trade

This tariff policy adds a layer of complexity to global trade. If this policy continues, the potential for retaliation from trading partners could arise. This uncertainty provides market participants with an additional reason to hold dollars as a hedging asset.

In the context of international trade relations, the US move shows a protectionist stance that could trigger new tensions. However, for the dollar, policies like this often strengthen its position as a safe-haven currency when risk increases.

Global Market Movement

Outside America, the impact of the dollar’s strengthening is widely felt. The Japanese yen weakened to its lowest level in eight weeks. The euro is around 1.1680 U.S. dollars.

In the precious metals market, gold prices tend to stabilize after having fallen briefly. Gold is supported by global uncertainty even though expectations for rate cuts have weakened.

Japanese Yen and Domestic Inflation

The yen weakened as capital flowed into the dollar. Meanwhile, core inflation in Tokyo remains above the Bank of Japan's target. This condition puts pressure on the Bank of Japan to consider tightening monetary policy.

However, the Bank of Japan is known to be cautious. Their interest-rate moves will be highly influenced by global trends, including the Fed's policy. If the Fed keeps interest rates high, the yen's position could come under increasing pressure.

The euro and the European market response.

The euro briefly firmed but remained under pressure against the dollar. The uncertainty caused by US import tariffs makes European investors more cautious. However, economic stability in the euro area remains the main pillar of support.

Analysts expect that the euro could only rebound if European inflation data shows a softening. If not, the dollar will still dominate the movements.

The U.S. dollar is currently at a crucial crossroads. Strong economic data provide support, but the direction of Fed policy will be heavily determined by the results of the PCE report. Markets are waiting with heightened vigilance as central bank decisions could alter the direction of global currency movements. For readers in Indonesia, the strengthening of the dollar could put downward pressure on the rupiah and affect import costs as well as investments. Stay tuned for global economic updates only on Insimen to understand the next impact.