Dollar set for third straight weekly gain after inflation data, Fed rate cut

By Chibuike Oguh

NEW YORK (Reuters) -The U.S. dollar retreated from a two-year high on Friday, but was heading for its third consecutive week of gains, with data showing a slowdown in inflation two days after the Federal Reserve delivered a cut to interest rates.

The dollar was down 0.47% on the day against a basket of six other currencies at 107.95 after spiking as high as 108.54 - its highest level since November 2022. It was set to end the week 1% higher.

Commerce Department data on Friday showed the personal consumption expenditures (PCE) price index - the Fed's preferred inflation gauge - rose 0.1% in November after an unrevised 0.2% gain in October.

But in the 12 months through November, the PCE price index advanced 2.4% compared with a 2.3% increase in the year to October.

"Personal income and personal spending were both under expectations, but the prior month the personal income was revised up, so I think this reaction is going to be fairly muted," said Helen Given, FX trader at Monex USA, Washington D.C.

The Fed cut interest rates by 25 basis points on Wednesday, with officials indicating that fewer cuts were coming in 2025 as inflation still remained above their targeted range despite its recent downward trajectory.

The yield on benchmark U.S. 10-year notes fell 6.2 basis points to 4.508%, after hitting a 6-1/2 month high following the Fed's rate decision.

"The annualised PCE print itself, again, slightly under expectations, but we're still above that 2% target, so I don't think this is doing to change anything that Jerome Powell said on Wednesday afternoon. I do think it's still quite likely that the Fed pauses in January."

The U.S. government will begin a partial shutdown if Congress fails to extend a deadline for a spending bill backed by President-elect Donald Trump to pass by midnight on Friday. The bill failed to pass in the House of Representatives on Thursday.

The dollar weakened 0.5% to 0.894 Swiss francs, but was still set for a second consecutive week of gains.

The euro edged higher after dipping to a one-month low of $1.03435 on the session, on track for its third straight week of losses, weighed down partly by Trump's comments that the European Union must purchase U.S. oil and gas to make up for its "tremendous deficit" with the world's largest economy, or face tariffs. It was last up 0.31% at $1.0394.

The dollar dropped to a five-month low of 157.93 Japanese yen after the Bank of Japan left interest rates unchanged. It was last down 0.65% at 156.4 yen.