Dollar Rebounds on Rising Yields, Upward GDP Revision

The dollar recouped early losses and moved higher on Wednesday, supported by a rise in Treasury yields and fresh signs of economic strength. The dollar index (DXY00) gained 0.09% for the session, according to data from Nasdaq.

The catalyst was a revised reading from the U.S. Bureau of Economic Analysis showing the economy expanded at a 2.2% annualized rate in the second quarter, up sharply from the preliminary estimate of 1.5% and above the 1.5% consensus forecast. The first-quarter growth figure was also revised upward to 2.5% from a prior 2.1%, the BEA said.

“The contributors to the increase in real GDP in the second quarter were consumer spending, investment, and exports. Imports, which are a subtraction in the calculation of GDP, increased,” the BEA said in a statement, as reported by RTHK.

The upward revision to GDP provided a tailwind for the dollar as traders recalibrated expectations for the pace of the economy. At the same time, the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, offered a mixed read.

The BEA reported that headline PCE inflation rose 0.3% in August month-over-month, below the 0.4% consensus estimate, and stood at 3.4% year-over-year, against expectations for 3.7%. On an annual basis, core PCE inflation, which excludes food and energy, came in at 3.0%, well below the 3.3% consensus forecast. Month-over-month, core PCE increased 0.2% in August, up from a downwardly revised 0.1% in July but lighter than the 0.3% analysts had expected.

The data left investors weighing whether the Fed could moderate its tightening pace. Kitco News reported that Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, described the releases as containing “mixed messages.”

“The economy is still expanding at a good pace (e.g. >2%), but inflation is running too hot (e.g. > 3%),” Zaccarelli said. “The monthly numbers are too high and rising (0.3% vs 0.2% prior), but the year-over-year numbers are improving (3.4% vs 3.7%).”

He added that the data showed the Fed “was probably correct in raising rates this month, but if the inflation data improves they might be able to skip a meeting or at least raise rates less than the 3 times in a row that many were worried about.”

Bill Adams, Chief U.S. Economist at Fifth Third Commercial Bank, offered a more cautious view, telling Kitco that the PCE report was “a glass half empty” for the Fed. “Inflation’s trend is lower but still not close to their target and not improving, either,” Adams said. He noted that the August report “leaves the Fed’s October decision still in play, with its outcome likely dependent on the September CPI and PPI reports as well as prices at the pump and geopolitical developments in coming weeks.”

The upward revision to GDP and the still-elevated inflation readings pushed Treasury yields higher, supporting the dollar. The dollar’s rebound reversed early weakness and kept the index in positive territory for the session.

Separately, the BEA reported that personal income rose 0.2% in August, below the 0.4% consensus, while personal spending jumped 0.9%, topping the 0.8% estimate. Adams warned that consumers remain under pressure, with the saving rate at its lowest since late 2022. “The PCE report doesn’t capture the boost to spending power from capital gains, which are a big help to affluent Americans but irrelevant for those living paycheck to paycheck,” he said.

Gold prices also reacted to the data, shooting to session highs, with spot gold last trading at $4,213.11 per ounce, up 0.74% on the day, according to Kitco.

The dollar’s move higher comes as markets continue to assess the Fed’s next policy steps. The central bank delivered a rate hike earlier this month, its first in three years. Wednesday’s data offered no clear signal on whether another increase is imminent, keeping the focus on upcoming inflation and employment reports.