Dollar holds gains as traders bet Fed will pause

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SINGAPORE – The US dollar trailed more than one-week highs on Friday as a flurry of overnight data pointed to a slowing US economy, with investors betting that the Federal Reserve would continue. continue to suspend interest rate hikes.

The dollar index, which measures the US currency against six rivals, fell 0.059% to 102.02, not far from the 102.15 it hit overnight, its highest level since May 2. This is set to break a two-week losing streak, up 0.7%. this week.

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Carol Kong, currency strategist at Commonwealth Bank of Australia, said the market could be encouraged by weak US economic data and continued expectations for some fairly strong interest rate cuts by the US. Fed this year.

Kong said the currency is likely to trade in a relatively tight range during Asian hours. “With today’s data schedule being fairly light, I think currencies are likely to remain in range recently and the market should be fairly quiet at the end of the week.”

The number of Americans filing new jobless claims rose to a 1.5-year high last week, showing cracks in the labor market as demand slows, according to Thursday’s data. showed a slight increase in producer prices in April.

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The reports are considered to be in line with most economists’ predictions of a recession later this year.

“These numbers should please the Fed, as any weakness in the labor market will be,” said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management. help cool down US inflation”.

Markets are pricing in a 98% chance that the Fed will hold out at its June meeting but have already begun pricing in a deep rate cut later this year, the CME FedWatch Tool shows. Interest rate futures indicate traders’ expectations that the Fed will begin cutting in September.

Minneapolis Federal Reserve President Neel Kashkari said on Thursday that prolonged periods of high interest rates and an inverted yield curve could put additional strain on banks, but would be necessary if inflation were to output is still high.

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Christopher Wong, currency strategist at OCBC, said there is still a big gap between the market and the Fed on the timing and size of rate cuts, with markets looking for a cut of around 75 to 80 points. fundamentals, while the Fed seems determined. to keep the exchange rate stable.

“There will be volatility as the market corrects to end the disconnect,” Wong said. “In the event that markets eventually let go of their dovish hopes and revise their rate expectations with the Fed, the USD could still find some support.”

Fed policymakers have about five more weeks of data to analyze before their next meeting, and said they intend to sift through that data carefully before making their decision.

Meanwhile, the euro rose 0.03% to $1.0917, while the Japanese yen gained 0.03% to 134.53 per dollar.

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The Australian dollar fell 0.01% to $0.670. Kiwi fell 0.24% to $0.628.

The British pound last traded at $1.2512, up 0.02% on the day, after falling 0.6% on Thursday.

The Bank of England raised its benchmark interest rate by a quarter of a percentage point to 4.5% on Thursday and Governor Andrew Bailey said the central bank would “stay on track” as it seeks to rein in it. the highest inflation rate of any major economy.

NatWest strategists said the absence of any dovish dilution to BoE policy guidance makes the possibility of further tightening possible but they believe inflation could ease during the year. now and that means no further increase may occur.

“We continue to expect headline inflation to ease rapidly in the coming months, while headwinds to consumers due to higher interest rates will dampen demand, meaning 4.5% is likely to fall. is the highest level of Bank Rate.”

(Reporting by Ankur Banerjee in Singapore; Editing by Christian Schmollinger)