Dollar strengthens as Fed cools rate cut expectations

24 May 2024 , 08:48 AM

A hawkish tone in Federal Reserve minutes and surprisingly solid U.S. economic data propelled the dollar towards its biggest weekly gain in over 15 months on Friday.

Thus far this week, the Australian dollar has down 1.3% to $0.6605, while the New Zealand dollar has lost almost 0.6% to $0.6098. In the morning hours of Asia, the euro was trading at $1.0814, down 0.5% for the week.

A retreat in expectations of a U.S. interest rate cut was prompted by overnight May numbers that revealed U.S. business activity accelerated to the greatest level in little over two years and manufacturers reported a spike in costs for a variety of inputs.

Again, surprising investors expecting rate cuts, minutes from the Federal Reserve’s April 30-May 1 meeting were released this week and revealed a genuine debate among officials about whether current rates are sufficiently restrictive to lower inflation.

The yen has been under significant pressure due to the dollar’s rise; it has lost around 0.8% of its value this week, to 157.10 per dollar. The yen has also declined on crosses, and at 169.65 to the euro, it is not far off the 22-year low of 171.44 that was reached last month.

In April, Japan’s core inflation rate fell for a second consecutive month, to 2.2%, in line with market expectations.

On Thursday, the euro saw a slight increase as a major European wage index increased, indicating that the rate of salary negotiations increased by 4.7% in the previous quarter. This helped move the euro away from a nine-month low against the pound and rattled market bets on a June rate decrease for Europe.

The European Central Bank wrote a blog post outlining several anomalous variables that contributed to the wage increase, but overall, the changes were minimal. Interest rate markets continue to project a nearly 90% probability of an ECB rate cut next month.

Early in the Asia session, there were just slight changes in currencies, and stock markets dropped. China began its war games in the Taiwan area for the second day. China’s yuan held stable in offshore trade, with a weekly decline anticipated at 7.2858 per dollar.

With a recent advance of about 0.6% on the week to 105.07, the U.S. dollar index—which compares the value of the currency to a basket of six important peers—is headed for its biggest one-week increase since mid-April.

Later in the day, traders will be watching final GDP data from Germany, retail sales in the UK and Canada, orders for durable goods in the US, and remarks by Federal Reserve and ECB policymakers, particularly Fed Governor Christopher Waller regarding longer-term rates.

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