FOREX-US dollar retreats as inflation runs warm, jobless claims tick higher

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 11 (Reuters) - The U.S. dollar weakened against major currencies such as the euro and yen on Thursday, as modestly hotter August inflation data and weaker-than-expected initial jobless claims reinforced the view that the Federal Reserve will resume cutting interest rates next week.

In afternoon trading, the dollar was down 0.3% against the yen at 147.09 yen JPY=EBS, while the euro rose 0.4% to $1.1738 EUR=EBS. As a result, the dollar index, a measure of the greenback's value against six major currencies, dipped 0.3% to 97.51 =USD.

The euro was also helped in part by diminished expectations of further cuts in borrowing costs, after the European Central Bank left interest rates unchanged on Thursday as expected and maintained an upbeat view on growth and inflation.

U.S. economic data, however, was the more predominant currency driver.

Data showed U.S. consumer prices rose more than expected in August while the annual increase in inflation was the largest in seven months. The Consumer Price Index increased 0.4% last month after increasing 0.2% in July, the Labor Department's Bureau of Labor Statistics said.

In the 12 months through August, the CPI advanced 2.9%, the largest increase since January, after climbing 2.7% in July.

"The CPI didn't come in as high as the market expected. Ultimately, the biggest concern ... is that the dovishness that comes with the weak jobs numbers is going to be unwound if CPI accelerates more than expected," said Eugene Epstein, head of trading and structured products, North America, at Moneycorp in New Jersey.

"But that didn't really materialize. Everybody would prefer CPI to be softer, but the point is, the data does not really change the course or move the needle for Fed rates."

More importantly, initial claims for state unemployment benefits jumped 27,000 to a seasonally adjusted 263,000 for the week ended September 6, data showed. Economists polled by Reuters had forecast 235,000 claims for the latest week.

CPI OVERSHADOWED BY JOBLESS CLAIMS?

"For the first time in a long time, CPI is being overshadowed on its release day by another data series," wrote Josh Jamner, senior investment strategy analyst at ClearBridge Investments in an email.

He noted that the spike in initial jobless claims to the highest level in four years had helped briefly push the 10-year Treasury yield below 4%, despite the larger-than-expected increase in the consumer price index.

"This dynamic illustrates the Fed's focus on the 'maximum employment' half of the dual mandate, with today's inflation print not hot enough in our view to derail a 25 basis point interest rate cut at next week's FOMC meeting."

Attention on the labor market has intensified after two poor U.S. jobs reports over the last few days. The non-farm employment number for August showed just 22,000 jobs created compared with forecasts of 75,000, while payrolls were revised downwards by 911,000 for the year ending in March.

Following Thursday's data, fed funds futures are pricing in a 91% chance of a 25 bp cut this month and a 9% chance of a 50 bp decline, according to the CME's FedWatch. That was unchanged from levels late on Wednesday.

In other currency pairs, the euro gained 0.2% against the yen to 172.78 yen EURJPY=EBS, and was flat against sterling at 86.14 pence EURGBP=EBS.

ECB President Christine Lagarde told a press conference after the bank held interest rates steady at 2% that the euro zone continues to be in a "good place," adding that inflation is where the ECB wanted it to be.

The euro is stabilizing after a two-day streak of declines as geopolitical tensions continue on the EU's eastern flank. Poland said it shot down suspected Russian drones in its airspace on Wednesday with the backing of aircraft from its NATO allies, the first time a member of the Western military alliance is known to have fired shots during Russia's war in Ukraine.

Elsewhere, the dollar fell 0.5% versus the Swiss franc to 0.7956 CHF=EBS, while sterling gained 0.4% versus the greenback to $1.3578 GBP=D3.

Also seemingly unnoticed was news that Stephen Miran moved closer to becoming a Fed governor, furthering U.S. President Donald Trump's effort to exert more direct control over interest rate policy. The Senate Banking Committee voted to advance Miran's nomination , though lawmakers involved said it is far from certain if the process can be completed in time for him to participate in the coming meeting.