The dollar ends the week with the best growth in two months amid a revision of Fed rate expectations

The US dollar is heading for its strongest week since early August: fresh data on the US economy turned out to be more stable than expected and forced traders to adjust expectations regarding further steps by the Federal Reserve System. 

The dollar index declined slightly on Friday after updating its three-week high the day before, but has increased by more than 0.7% since the beginning of the week.

The yield on 2-year Treasury bonds shows the largest weekly rise since July. The market now estimates the probability of two Fed rate cuts of 25 bps by the end of the year as only 50-50, whereas previously such a scenario was almost completely taken into account in quotes.

Investors are waiting for the publication of the Personal Consumption Expenditures Price Index (PCE) for August, a key indicator of inflation for the Fed. Danske Bank notes that strong macro data «has become a warning to the regulator» and may return attention to the inflationary mandate.

Despite a slight weakening on Friday, the dollar remains close to local highs: it has updated its peaks against the Canadian dollar since May, against the New Zealand dollar since April, and against the yen over the past two months. A positive PCE report may consolidate the uptrend and confirm the best dynamics of the US currency in months.