As a slew of night-time data points indicated a weakening U.S. economy, the U.S. dollar clung to a more than one week high on Friday, with investors deciding that the Federal Reserve will hold off on raising interest rates.
The dollar index, which compares the value of the greenback to six rival currencies, declined 0.078% to 102, not that far from the overnight peak of 102.15, its highest level since May 2.
With a 0.7% increase this week, the index is expected to end a two-week losing run.
Carol Kong, a currency analyst with Commonwealth Bank of Australia, claimed that the market continued to price in some fairly assertive rate reduction by the Fed this year despite the market being likely buoyed by dismal U.S. economic data.
Based on data released on Thursday, the number of Americans submitting new claims for the unemployment benefits increased to a 1-1/2-year peak last week, signalling cracks in the labour sector as demand weakens. The same data also revealed that producer prices moderately increased in April.
The reports were thought to be in line with most experts’ predictions of a recession by this year’s end.
As seen in the CME FedWatch Tool, the markets are currently pricing in a 98% chance that the Fed will hold steady at its June meeting but have already begun to price in significant interest rate decreases by the close of the year.
Rate futures contracts indicate that traders anticipate the Fed to begin reducing rates in September.
Neel Kashkari, current president of the Minneapolis Federal Reserve, stated on Thursday that prolonged periods of high interest rates alongside an inverted yield curve may place additional strain on banks, but that they may be essential if inflation continues to rise stubbornly.
According to Christopher Wong, currency strategist for OCBC, there is still a significant gap between the expectations of the markets and the Fed about the timing and magnitude of rate cuts.
The markets anticipate cuts of about 75 to 80 bps – or basis points, while the Fed appears committed to keeping rates steady.
Wong claimed there will be certain harsh volatility once the market corrects itself to narrow the disconnect.
The dollar may yet find support if markets eventually abandon their dovish assumptions and realign their rate assumptions with the Fed.
Before their next gathering, Fed’s policymakers have around five more weeks of stats to analyse, and they have stated that they will carefully sort through it before reaching a decision.
The approaching deadline for lifting the U.S. debt ceiling and also Treasury Secretary Janet Yellen’s scheduled conversation with board members belonging to Bank Policy Institute lobby organisation next week about the standoff over raising the debt ceiling weighed on sentiment as well.
The Australian and New Zealand dollars both fell to their one-week troughs on Friday, while the Chinese yuan sank past a critical level to a new two-month trough against the greenback.
The New Zealand dollar dropped 0.57% to $0.626 while the Australian currency last declined 0.09% to $0.670.
Data over the course of the week revealed that post-pandemic expenditure and growth are being restrained by low confidence, which is slowing China’s economic recovery.
Silvia Dall’Angelo, who is a senior economist with Federated Hermes, claimed weak inflation and credit trends would likely lead China’s central bank to loosen monetary policy to boost the recovery this year.
Sterling recovered some of its losses in other places and was last observed to be trading at about $1.2523, up 0.11% today after down 0.6% on Thursday.
The pound has been trading at the $1.2497 pit it reached one week ago after the Bank of England increased its benchmark interest rate by about merely a quarter of a percentage point to a stat of 4.5% on Thursday.
The lack of any dovish modification to the BoE’s policy guidelines, according to NatWest analysts, leaves the prospect open to further tightening.
However, they predict inflation may gently ease through 2023, which may mean additional hikes may not come.
The euro increased by 0.09% to $1.0924, whilst the Japanese yen was essentially unchanged at $1.34.