Dollar extends gains, inflation data eyed

NEW YORK: The dollar rose on Wednesday after a report showed US producer prices rebounded in August and as traders turned their focus to consumer inflation data due on Thursday that will be closely watched by the US Federal Reserve as it considers when to next raise interest rates.

The dollar index, which tracks the currency against a basket of six major rivals, was up 0.45 percent at 92.295, after rising to 92.336, its highest in a week.

The index rose after the US Labor Department said its producer price index for final demand increased 0.2 percent in August after slipping 0.1 percent in July. The rebound was driven by a surge in the cost of gasoline.

While domestic producer prices rose less than forecast, "the rebound does suggest that the US economy retains underlying momentum," said Karl Schamotta, director of global market strategy at Cambridge Global Payments in Toronto.

"The overall demand picture is quite strong and prices are beginning to respond to an increases in demand in the real economy," he said.

Schamotta, however, warned that last month's increase in producer inflation may not point to a similar gain in prices paid by consumers.

"Historically speaking there is no extremely high correlation between the producer prices and consumer prices," he said. "The tail does not wag the dog."

Economists polled by Reuters expect Thursday's data to show consumer prices rose 0.3 percent in August and 0.2 percent excluding food and energy.

Inflation is being closely watched for clues on the timing of the next interest rate increase.

The dollar, which rallied to its strongest levels in a decade and a half at the start of 2017, has faltered since on the view that the pro-growth, pro-inflation policies promised by US President Donald Trump had not materialized, as well as a pushing back of Fed rate hike expectations.

The dollar index fell to 91.011, its lowest since January 2015 last week, on worries linked to Hurricane Irma and North Korea, but has recovered as risk aversion has ebbed significantly.

The Fed meets next week, but is not expected to raise rates.

Meanwhile, sterling fell back from a one-year high to trade lower against the dollar as weaker-than-expected UK wage growth put a brake on bets that the Bank of England could change its interest rate stance due to a surge in inflation.