• U.S. PCE index rises 0.2% in July, in line with forecasts
• U.S. consumer spending rises in July
• Dollar set for biggest weekly rise vs yen since mid-June
• Dollar index on track for worst month since November 2023

NEW YORK, Aug 30 (Reuters) - The U.S. dollar gained on Friday after data showed a key inflation measure came in line with forecasts, while personal spending and income increased, supporting expectations the Federal Reserve will likely cut interest rates by a smaller 25 basis points next month, instead of 50 bps.

Some market participants had expected the larger cut next month on the notion that the Fed was behind the curve in terms of easing and should play catchup.

U.S. rate futures on Friday implied a 31% chance of a 50 basis-point rate cut next month, down from Thursday's 35% probability, LSEG calculations showed, with the market fully pricing at the September meeting the Fed's first easing in more than four years.

Markets have also factored in about 100 bps of cuts by the end of 2024.

The dollar rose 0.8% to 146.09 yen after the inflation data , for its largest daily gain in two weeks. It was up 1.2% for the week, on track for its biggest weekly rise since mid-June.

But the greenback remained down 2.6% for August, falling for a second straight month versus the Japanese currency.

Friday's data showed the personal consumption expenditures (PCE) price index rose 0.2% last month, in line with expectations, after an unrevised 0.1% advance in June. In the 12 months through July, the PCE price index increased 2.5%, matching June's gain.

Consumer spending was also 0.5% higher last month after expanding 0.3% in June.

"Obviously, we are going to get a rate cut, and I think that whether it's 25 or 50, that's still debatable and that will all depend on next week's employment data," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"I see three rate cuts and I see the possibility of a half a percent in September, depending on the employment data. If not, it'll be 25-basis-point cut in September and then 50-basis-point cut in December."

The dollar index, a gauge of its value against six major peers, climbed to a 10-day high after the inflation data and was last up 0.3% at 101.7 . On the week, it rose 1%, on track for its best weekly performance since early April.

This month, however, the index fell 2.6%, its weakest since November last year.

The dollar overall continued to benefit from month-end flows, having been sold after Fed Chair Jerome Powell at a Jackson Hole gathering last week gave the clearest signal yet that the U.S. central bank will cut interest rates at the September meeting.

Separate economic reports showed that the University of Michigan's monthly consumer sentiment index survey edged up to 67.9 in August from July's eight-month low of 66.4, snapping a four-month slide. U.S. consumers see inflation continuing to moderate in the next year, the survey showed, with a gauge of price growth expectations published on Friday at the lowest level in August since late 2020.

The dollar briefly trimmed gains after the report.

In other currencies, the euro dipped 0.2% against the dollar to $1.1050 . It has fallen 1.3% this week, on track for its largest weekly loss since April.

The euro, however, rose 2.1% in the month of August, for its best monthly showing since November 2023, with the European Central Bank still on track to lower interest rates again next month.

The single currency fell to a more than one-week low on Thursday and ended down 0.4% after German inflation cooled more than expected, bolstering investors' expectations of ECB cuts.

The Chinese yuan firmed to a 14-month high against the dollar, for its biggest monthly jump since November, amid growing corporate demand for the Chinese currency as expectations heighten for U.S. rate cuts.

The onshore yuan strengthened as far as 7.0825 per dollar before last changing hands at 7.0920, on track for a rise of around 1.9% for August.

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https://www.reuters.com/markets/currencies/dollar-set-snap-5-week-losing-streak-fed-cut-bets-pared-2024-08-30/