The dollar weakened against the euro and Swiss franc on Friday, on course for a 2% decline in August against a basket of currencies, as traders prepared for a U.S. interest rate cut by the Federal Reserve next month.

The dollar, which initially firmed after U.S. inflation data came in as expected, later gave up gains, failing to break a three-day losing streak.

The U.S. Commerce Department reported on Friday that its Personal Consumption Expenditures (PCE) Price Index rose 0.2% last month after an unrevised 0.3% rise in June.

The data keeps the Fed on track for a widely expected rate cut at its upcoming meeting on September 16-17. Money markets are pricing in an 87% chance of an easing, up from 63% a month earlier, CME's FedWatch tool showed.

The dollar index, which measures the greenback against a basket of currencies, was down 0.09% at 97.803 in afternoon trading.

"FX markets remain range bound as investors await the next U.S. labor market report on September 5th," said Dan Tobon, head of G10 FX strategy at Citi.

Weak consumer sentiment continues to hang over an anxious market, which is rebalancing and hedging portfolios at month's end after U.S. equities rallied throughout August, said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

Moreover, U.S. President Donald Trump's campaign to exert more influence over monetary policy, including this week's attempt to fire Fed Governor Lisa Cook, has weighed on the dollar.

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A federal judge said on Friday she would set an expedited briefing schedule in Cook's bid to temporarily block Trump from firing her while she pursues a lawsuit that says he has no valid reason to remove her.

"Market instability remains in focus, further fueled by media coverage surrounding Fed Governor Cook's hearing regarding her contested dismissal," Shinohara said.

Trump is trying to reshape the Fed after repeatedly criticizing the central bank and its chair, Jerome Powell, for not cutting interest rates.

Fed Governor Christopher Waller, who is said to be under consideration by Trump to succeed Powell as the Fed chair, said on Thursday he wanted to start cutting rates next month and "fully expects" more rate cuts to follow to bring the central bank's policy rate closer to a neutral setting.

"Interestingly, the FX reaction function to policy announcements and developments with the Fed seems fairly muted – this could be a function of illiquid summer markets," said Citi's Tobon. "Or it could be a function of markets expecting any changes at the Fed will lead to a cutting cycle similar to what is already priced. That reinforces our view it will be all about the data."

Source: Investing.com