NEW YORK >> The U.S. dollar eased marginally today after data showed inflation in the world’s largest economy subsided last month, cementing expectations the Federal Reserve will start cutting interest rates this year.

The dollar initially fell against the yen, the currency pair most sensitive to U.S. economic data because of a high, positive correlation to Treasury yields. The greenback, however, edged higher to trade flat on the day, with investors still focused on the wide interest rate differential between the United States and Japan.

The dollar was last up slightly against the Japanese unit at 160.815 yen, after earlier hitting a 38-year high of 161.27 yen. Traders remained on high alert for intervention from Japanese authorities to boost its currency.

The U.S. currency has posted monthly and quarterly gains versus the yen of about 1.9% and 5.9%, respectively.

Data showed the U.S. personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, was unchanged last month, and followed an unrevised 0.3% gain in April, data showed. In the 12 months through May, the PCE price index increased 2.6% after advancing 2.7% in April.

“The PCE report was mostly in line with expectations, which confirms the disinflationary trend as shown by the CPI (consumer price index), PPI (producer price index) numbers earlier this month,” said Boris Kovacevic, global macro strategist at Convera in Vienna, Austria. “The macro data continues to point to a softening of the U.S. economy.”

Following the inflation data, fed funds futures slightly raised the chances of easing in September to around 67%, from about 65% late Thursday, according to LSEG calculations. The market is also pricing between one to two rate cuts of 25 bps each this year.

A separate report on Thursday showed business activity in the Midwest came in better than expected, modestly helping the dollar. The Chicago purchasing managers’ index (PMI) jumped to 47.4 from 35 in May, and better than the 40 that economists projected.

University of Michigan consumer sentiment, meanwhile, showed a reading of a better-than-expected 68.2 for June, also dollar-supportive. In addition, respondents to the sentiment survey expect near- and long-term inflation expectations to level out at 3%.

In other currencies, the euro was up 0.2% at $1.0719.

The euro, down 1.3% against the dollar in June, was on track for its biggest monthly fall since January as political uncertainty weighed in the run-up to France’s general elections.

For the second quarter, Europe’s single currency fell 0.7%.

Investors fear a new French government could increase fiscal spending, threatening the sustainability of the country’s public debt and the financial stability of the bloc.

Against the Swiss franc, the dollar was little changed at 0.8986 francs.

Aside from the economic data, market participants were also focused on U.S. politics.

Republican U.S. presidential candidate Donald Trump unleashed a barrage of at-times false attacks on President Joe Biden in their first campaign debate in Atlanta, with the dollar rising as Biden stumbled over his words a few times in early exchanges.

The debate increased the odds of a Trump presidency and the imposition of import tariffs. Traders bought dollars overall.

“A Trump victory is dollar-positive for several reasons, including a presidency that may be more aggressive on tariffs and could lead to more fiscal expansion, which is inflationary and would trigger higher policy rates,” said Barclays rate strategist Lefteris Farmakis.