US Dollar | Image:Pixabay
The euro fell to its lowest level in five months against the dollar on Friday following indications from the European Central Bank (ECB) that it might consider cutting interest rates soon, diverging from expectations for the US Federal Reserve to maintain higher rates until later in the year.
Amid the broad strength of the dollar, the Japanese yen also reached a 34-year low as investors speculated on potential intervention from central bank authorities.
Recent economic data from the United States, particularly concerning the labor market and inflation, led to a shift in market expectations regarding a rate cut by the Federal Reserve, prompting a recalibration of anticipated rate cuts.
Expectations for a rate cut of at least 25 basis points (bps) in June have declined to 24.9 per cent, down from 53.2 per cent a week ago, according to CME’s FedWatch Tool. Similarly, expectations for a cut in July have fallen to 52.8 per cent from 72.5 per cent in the previous week.
This contrasts with the European Central Bank (ECB), which hinted at the possibility of rate cuts starting as early as June.
Joseph Trevisani, a senior analyst at FX Street in New York, commented, “It’s evident what’s happening; we’re witnessing a play on dollar strength driven by U.S. interest rates. The Fed is relying on its scenario, neither aspect of which is proving true. Inflation was expected to decrease, but it hasn’t, and the economy was expected to weaken, which it hasn’t. Consequently, they have no grounds to justify rate cuts.”
The divergence in interest rate expectations has widened the spread between US bond yields and German euro zone benchmark yields to the highest level since 2019, making U.S. bonds more appealing and bolstering the dollar.
The dollar index rose by 0.75 per cent to 106.06, reaching its highest level since November 3. For the week, the dollar was up by more than 1.7 per cent, marking its most significant weekly gain since September 2022.
U.S. economic data released on Friday showed that import prices rose for the third consecutive month in March due to increases in energy and food costs. However, underlying inflation pressures from imports remained subdued. Additionally, a preliminary survey from the University of Michigan revealed a slight softening in U.S. consumer sentiment in April, accompanied by an increase in inflation expectations for the next 12 months and beyond.
Meanwhile, the euro fell by 0.91 per cent to $1.0626, hitting its lowest level since November 3, and was set for its most substantial weekly percentage drop since late September 2022.
The yen rebounded slightly against the dollar after reaching its highest level since the mid-1990s at 153.38 yen. Against the Japanese yen, the dollar weakened by 0.28 per cent to 152.85 yen.
Finance Minister Shunichi Suzuki’s remarks about the potential for currency intervention helped mitigate the yen’s movements compared to other currencies on Friday. The Japanese currency was on track for a weekly decline of approximately 0.8 per cent, its second consecutive week of losses against the dollar.
(With Reuters inputs)
