On Friday, the U.S. dollar strengthened versus the euro and the pound, and it was on pace to post its largest weekly gain since February as investors fled risky assets following data on consumer sentiment stoked worries about the country’s debt ceiling and monetary policy.
In May, according to a University of Michigan study, consumer confidence in the United States hit a six-month low due to concerns that a political standoff over raising the federal government’s borrowing limit might lead to a recession. Long-term inflation expectations among consumers increased to their highest level since 2011. That might have an impact on the Federal Reserve, which hinted last week that it might suspend raising interest rates.
The dollar continues to benefit from rate differentials, according to Karl Schamotta, chief market strategist at Corpay in Toronto.
The unexpected results of the University of Michigan consumer sentiment poll “are painting somewhat of a stagflationary picture for the U.S. economy, one that could justify another rate hike at the June Fed meeting, but one that will undoubtedly reduce the likelihood of rate cuts in the second half of the year.”
Recent evidence of a slowing economy has strengthened the argument that the Fed will hold off on raising rates at its meeting in June. Inflation in the U.S. consumer price index decreased to 4.9% on an annual basis in April, according to data. Additionally, weekly jobless claims increased more than anticipated.
However, the labour market is still tight, with 1.6 job postings for every unemployed person in March, far above the 1.0–1.2 range that would be expected from a market that is not inducing excessive inflation.
Fed Governor Michelle Bowman stated that if inflation remains high, the central bank would likely need to raise rates further.
The euro declined 0.6% to $1.0851, a day after hitting a one-month low, while the pound dropped 0.5% to $1.2448.
The dollar index then increased 0.6% to 102.69, recording a weekly gain of 1.4%, the largest weekly increase since February.
The Fed’s year-end rate reduction were met with some scepticism because to increased U.S. inflation, according to Joe Manimbo, senior market analyst at Convera, and European currencies have suffered as a result of the perception that other central banks may be close to stopping rate hikes as well.
“This week’s dollar gains have taken many different forms. The dollar has offered protection from concerns about the shaky Chinese economy and the turbulence on Wall Street, according to Manimbo.
Futures dealers predict that the fed funds will slow down in June and dip later in the year. Since March 2022, the Fed’s target range has quickly increased from 0% to 5% to 5.25%.
