The U.S. dollar fell on Thursday amid rising prospects of an interest rate cut by the Federal Reserve next week, and probability of more reductions before the end of the year, in the wake of the recent data on inflation.

The U.S. Labor Department said its producer price index for final demand crept up by 0.2% in August, while revised data showed prices were unchanged in July.

Economists had expected producer prices to inch up by 0.1%, matching the uptick originally reported for the previous month.

At the same time, the report said the annual rate of producer price growth slowed to 1.7% in August from a downwardly revised 2.1% in July.

The year-over-year increase by producer prices was expected to decelerate to 1.8% from the 2.2% originally reported for the previous month.

While the data has seemingly reduced the likelihood the Federal Reserve will cut rates by 50 basis points next week, rates are still expected to be notably lower by the end of the year.

CME Group's FedWatch Tool currently suggests rates will lower by at least a full percentage point following the Fed's December meeting.

A separate data from the Labor Department showed initial jobless claims rose to 230,000 in the week ended September 7th, an increase of 2,000 from the previous week's revised level of 228,000. Economists had expected jobless claims to inch up to 230,000.

The European Central Bank lowered its interest rate by 25 basis points today, marking the second cut this year.

The dollar index dropped to 101.23, losing nearly 0.5%.

Against the Euro, the dollar weakened to 1.1078 from 1.1014, and against Pound Sterling, it eased to 1.3128 from 1.3042 a unit of the British currency.

The dollar weakened against the Japanese currency by nearly 0.4% to 141.82 yen. Against the Aussie, the dollar shed more than 0.7% at 0.6723.

The Swiss franc gained marginally against the dollar at CHF 0.8511, while the Loonie edged down slightly to C$ 1.3582 a U.S. dollar.

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