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Dollar steadies near six-month highs; U.S. economy shows resilience

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Dollar steadies near six-month highs; U.S. economy shows resilience
© Reuters.

Investing.com – The U.S. dollar steadied near a six-month peak in early European trade Thursday, boosted by signs of a resilient U.S. economy even as the global outlook weakened. 

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 104.897, having earlier reached just short of 105, its highest level since mid-March. 

U.S. economy shows resilience

Data released Wednesday showed that activity grew more than expected in August, with a gauge of prices in the sector also rising further.

The readings fueled concerns that inflation will remain sticky in the near-term, eliciting a continued hawkish outlook from the Federal Reserve.

Unemployment data later in the session is expected to show that the U.S. labor market remains healthy, with expected to rise slightly to 235,000 from 228,000 the prior week.

Also of interest Thursday will be the plethora of Fed officials due to speak later at a fintech conference hosted by the Philly Fed, before they enter the blackout period ahead of their meeting later this month.

Weak German industrial production weighs on euro

Elsewhere, the economic news looks a lot less impressive.

fell 0.1% to 1.0719, near its lowest level since June, after fell 0.8% in July compared to the previous month, more than the expected 0.5% drop, underlining the challenges faced by manufacturing in Europe’s largest economy.

European Central Bank policymakers were keen to warn investors on Wednesday that the central bank could still hike interest rates again, in what would be its 10th consecutive rise, when they meet next week.

However, with economic activity deteriorating across the region, expectations are rising that the Governing Council will choose to pause, even if it keeps the door open to further moves.

British house prices slump

fell 0.1% to 1.2502, not far away from the three-month low seen in the previous session, after data from Halifax, the U.K.’s largest lender, showed that fell 4.6% on an annual basis in August.

This suggests that prices are falling at the fastest rate since the aftermath of the financial crisis, and things are likely to get worse with Halifax expecting further downward prices on property prices.

Weak trade data weighs on Chinese yuan

rose 0.1% to 7.3254, with the yuan falling to its weakest level since November 2022, after weak economic data from China also dented sentiment towards Asian markets, with both and in the country continuing to decline through August, albeit at a slower-than-expected rate.

fell 0.1% to 147.50, with the yen near a 10-month low, weighed by two Bank of Japan officials reiterating that the bank is likely to maintain its ultra-dovish policy in the near-term.

 

Forex

Dollar falls after CPI, Fed meeting; PPI release due

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Investing.com – The U.S. dollar fell Thursday, as traders weighed up the competing factors of benign U.S. inflation yet a more hawkish Federal Reserve. 

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 104.340, after trading at its strongest level since mid-May earlier in the week.

Dollar awaits PPI release

The dollar saw some volatile trading on Wednesday, falling in the immediate aftermath of the U.S. inflation report, which showed flat month-to-month in May against market expectations of a 0.1% rise.

Before paring some of these losses when the left the funds rate on hold at 5.25%-5.5% and detailing that policymakers’ median projection for the number of cuts this year fell to just one, from three in March.

That said, “we continue to expect a first rate cut in September and a second cut in December,” Goldman economists said in a note.

This brings Thursday’s release firmly into focus, with the headline figure expected to show monthly growth of 0.1% in May, a drop from 0.5% growth the prior month.

The release, which excludes volatile food and energy prices, is expected to show monthly growth of 0.3%, a drop from 0.5% growth the previous month. 

“A soft PPI reading today will raise expectations of another ‘on-target’ 0.2% month-on-month core PCE reading and give both the Fed and the market a little more confidence that the central bank may be able to cut rates in September after all,” analysts at ING said, in a note. “This is why we have a down arrow on the dollar today.”    

Euro strengthens after more inflation data

rose 0.1% to 1.0812, continuing to gain after rising 0.6% overnight, as traders digested more regional inflation data.

fell by 0.7% in May compared with the same month last year, while rose 3.6% on an annual basis in May.

“EUR/USD did well to spike to 1.0850 yesterday and probably argues that we are in some kind of broad 1.0720-1.0900 trading range for the near term,” said ING.

“Here, the two opposing forces will be softer US price and activity data potentially dragging the dollar complex lower set against French political risk, where a further risk premium could still be built into the euro.”

fell 0.1% to 1.2790, after rising 0.5% overnight to $1.2798 after the release of the U.S. inflation data, with the U.K. releasing its monthly CPI number next week.

“UK May CPI is released next Wednesday and the sticky core services component (5.9% year-on-year in April) may well come down,” said ING. “That is why we are reluctant to chase the current rally in sterling and can probably see the top of this year’s range holding for GBP/USD at 1.2850/2900.”

BOJ meeting due

In Asia, traded 0.3% higher to 157.23, with traders now awaiting more cues on policy from the on Friday.

The central bank is likely to keep rates steady, but is expected to scale back some of its bond purchases in a bid to tighten policy. 

gained 0.2% to 7.2519, close to six-month highs as reports of more U.S. trade scrutiny against China dented sentiment towards the yuan this week.

 

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Forex

Dollar gains on hawkish Fed, even as inflation cools

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By Karen Brettell

NEW YORK (Reuters) -The dollar gained on Thursday despite a soft U.S. producer price inflation report for May, after the Federal Reserve adopted a hawkish tone at the conclusion of its meeting on Wednesday.

Data on Thursday showed that U.S. producer prices unexpectedly fell in May, with the headline producer price index (PPI) dropping 0.2% last month after advancing by an unrevised 0.5% in April. Core prices were flat, after also seeing a 0.5% increase the prior month.

It comes after May’s U.S. consumer price index (CPI) on Wednesday was softer than economists had expected, prompting a sharp sell-off in the greenback.

Combined, the CPI and PPI releases make it likely that Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, will also show softening price pressures.

“Today’s PPI comes on the heels of a softer than expected CPI … which is going to feed into what probably is going to be a somewhat softer core PCE deflator when we get it at the end of the month,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

But optimism over cooling inflation was not enough to keep the dollar down.

The U.S. currency rebounded after Fed officials on Wednesday unexpectedly forecast only one interest rate cut this year and pushed out the start of rate cuts to perhaps as late as December.

Fed Chair Jerome Powell said policymakers were content to leave rates where they are until the economy sends a clear signal that something else is needed – through either a more convincing decline in price pressures or a jump in the unemployment rate.

Other data on Thursday showed that the number of Americans filing new claims for unemployment benefits increased to a 10-month high last week.

The was last up 0.49% at 105.20. It reached a four-week high of 105.46 on Tuesday, before dropping as much as 1% after Wednesday’s CPI data.

“It was a bit overdone, the reaction (to) that CPI. It was almost a relief that it wasn’t worse. And that’s what sparked such a strong knee-jerk reaction,” said City Index market strategist Fiona Cincotta.

Traders had pared bets that the Fed will cut in September after Friday’s employment report for May showed more jobs growth than expected, while wages also rose more than was anticipated.

Those bets were revived, however, after Wednesday’s CPI report.

Fed funds futures traders now see two cuts this year as likely, with a first cut in September seen as a 68% probability, according to the CME Group’s FedWatch Tool.

The dollar is likely to remain supported as Fed policy contrasts with more dovish international central banks.

“I’m not convinced that the dollar’s top is in place on this move,” Chandler said. “We might not be yet at the maximum policy divergence.”

The European Central Bank and the Bank of Canada have begun cutting rates, and may cut again before the Fed begins easing.

Uncertainty over European elections is also likely to hurt the euro against the greenback.

“This political uncertainty in Europe is sufficient to keep the dollar bid,” Chandler said.

Far-right parties gained ground in European Parliament elections on Sunday, prompting French President Emmanuel Macron to call a snap election in his country.

The euro was last down 0.65% at $1.0739. It fell as low as $1.07195 on Tuesday, the lowest since May 2, before jumping as high as $1.08523 on Wednesday as the dollar weakened.

The yen also fell before the Bank of Japan concludes its two-day meeting on Friday when it will consider trimming its bond buying, taking a first key step to reducing its almost $5 trillion balance sheet.

The yen in particular has suffered from the wide divergence between Japanese and U.S. interest rates.

© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

The dollar was last up 0.11% at 156.89 yen.

In cryptocurrencies bitcoin fell 1.86% to $66,801.

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Sterling set for fifth weekly gain against euro after shock French election call

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LONDON (Reuters) – The pound was headed for its fifth weekly gain against the euro on Thursday, having hit its highest in almost two years against the single European currency, which was rattled by political uncertainty in France.

The euro fell to its lowest against the pound since late August 2022 this week, after the success of far-right parties in a European Union parliamentary election at the weekend prompted French President Emmanuel Macron to call a snap vote in his country, which spooked investors.

The pound was already in the ascendant against the euro, which is already up almost 2.5% in value so far this year, mostly based on the expectation that UK rates will remain above those in the euro zone for some time to come.

On Thursday, sterling was last flat against the dollar at $1.2798 and steady against the euro at 84.44 pence.

Data on Wednesday that showed U.S. inflation cooled more quickly than expected in May prompted a sell-off in the dollar, boosting sterling 0.5%. The sell-off slowed after the U.S. Federal Reserve released its projections for interest rates, growth and inflation.

On Thursday, the pound offered little reaction to the opposition Labour party’s manifesto, released ahead of the July 4 general election.

Data this week has painted a fairly stagflationary picture for the British economy, with wage growth still running hot, while economic growth had completely stalled in April.

Traders expect at least one rate cut from the Bank of England this year, but the jury is out on whether or not there will be a second.

The BoE meets next week. Futures markets currently show traders are placing a 75% chance of a cut by September, with a cut fully priced in for November.

“Because market pricing is already so hawkish, there are risks of a larger market reaction if the BoE appears relatively unconcerned about recent strong data. We continue to expect two BoE cuts this year in August and November,” Nomura economists led by George Buckley said in a note.

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/ File Photo

The pound, meanwhile, has been steadily gaining ground. So far this year, it’s the only major currency in positive territory against the dollar, with a rise of 0.5%. The nearest rival is the offshore , which has weakened by 2%.

On a trade-weighted basis, the pound is at its highest since the Brexit vote in June 2016.

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