US data lifts dollar as Fed hike expectations edge higher

By Chuck Mikolajczak

NEW YORK, Aug 26 (Reuters) - The dollar was higher on Wednesday after a round of U.S. economic data, including a reading on inflation that slightly increased expectations for a rate hike from the Federal Reserve ahead of the Jackson Hole symposium of central bankers this week.

The Commerce Department said the Personal Consumption Expenditures Price Index increased 3.7% in the 12 months through July, unchanged from June and slightly above the 3.6% estimate of economists polled by Reuters. On a month-over-month basis, PCE rose 0.2% versus the estimate calling for a 0.1% increase, after falling 0.1% in June.

"Overall, because the headline was warm enough to prevent a dovish victory, those details weren't really strong enough to hand the hawks a clear win, so I wouldn't chase the rally at all," said George Vessey, lead FX and macro strategist at Convera in London.

"But I wouldn't fade it aggressively either, we've got loads of competing narratives driving FX at the moment, particularly the dollar, haven't we, so it's hard to have a strong conviction in either direction right now."

The dollar index, which measures the greenback against a basket of currencies, rose 0.21% to 99.12 and was on pace for its biggest daily gain since August 6, with the euro down 0.16% at $1.1655.

ECB SIGNALS FURTHER RATE RISES

European Central Bank (ECB) board member Isabel Schnabel said interest rates must rise further as the conflict in the Middle East drags on and the strong euro zone economy poses upside risks to inflation, in an interview with Bloomberg News published on Wednesday.

The comments came after Reuters reported on Tuesday that ECB policymakers are ready to raise interest rates at their next meeting in September to contain the side-effects of the Iran war but they have little appetite to signal further tightening after that.

Separately, other U.S. data showed the updated reading of second-quarter economic growth came in at 1.5%, unchanged from the initial estimate.

The Commerce Department also said personal income increased 0.4% in July, topping the 0.2% estimate, while consumer spending, which accounts for more than two-thirds of economic activity, was unchanged after a 0.3% increase in June.

Expectations for a rate hike from the Fed inched up after the data, with markets now pricing in a 40.1% chance for an increase of at least 25 basis points at the central bank's September meeting, according to CME FedWatch, up from about 36% before the release.

On Friday, Federal Reserve Chairman Kevin Warsh will make his debut speech at the annual Jackson Hole conference, although many market participants believe it is unlikely the central bank head will offer any policy outlook.

Boston Fed President Susan Collins said on Tuesday that the Fed will need to raise interest rates soon unless coming data show a continued decline in inflation that remains too high and which has become a "pervasive" concern for businesses and households.

The greenback had stumbled late last week after U.S. Treasury Secretary Scott Bessent said the Treasury would double the size of quarterly repurchases of longer-dated bonds, sparking concerns that a shift to a more direct strategy to mitigate the rise in borrowing costs could lead to a debasement of the dollar.

The Canadian dollar weakened 0.24% versus the greenback to C$1.387 per dollar, reversing slight gains from the prior day after Ottawa placed retaliatory tariffs on about $20 billion worth of U.S. annual imports and rolled out aid for businesses and workers after trade talks with the U.S. collapsed over the weekend.

The Japanese yen weakened 0.11% against the greenback to 159.34 per dollar. Sterling weakened 0.35% to $1.3601 and was on track for its biggest daily drop since August 3.

(Reporting by Chuck Mikolajczak; additional reporting by Gregor Stuart Hunter. Editing by Philippa Fletcher and Nick Zieminski)