Dollar poised for weekly rise as bets on interest rate cut fade

Dollar poised for weekly rise as bets on interest rate cut fade
Dollar poised for weekly rise as bets on interest rate cut fade

The dollar saw its biggest weekly rise in a month and a half on Friday, helped by surprisingly strong US economic indicators and a hawkish tone in Federal Reserve minutes.

The Australian dollar is down 1.3% to $0.6605 since the start of the week and the New Zealand dollar is down 0.6% to $0.6098. The euro is trading at $1.0814 in morning trading in Asia, down 0.5% for the week.

Overnight, May figures showed that U.S. business activity accelerated to its highest level in just over two years and manufacturers reported higher prices for a series of inputs, which caused a decline in expectations for interest rate reductions in the United States.

“Traders have pushed back the date of the first Fed rate cut to December,” said Jameson Coombs, an economist at Westpac.

Minutes of the Federal Reserve’s April 30-May 1 meeting, released this week, also noted a lively debate among policymakers over whether current rates are restrictive enough to curb the inflation, which once again surprised investors who were expecting rate cuts.

The dollar’s gains have kept strong pressure on the yen, which has weakened about 0.8% in the week so far, to 157.10 per dollar. The yen also fell on the crosses and, at 169.65 per euro, it is not far from the 22-year low reached last month at 171.44.

Japan’s core inflation slowed for the second straight month in April, meeting market expectations at 2.2%.

The euro received a small boost on Thursday when the key European wages indicator recovered, showing that the pace of negotiated wages increased by 4.7% over the last quarter. That dented market bets on a June rate cut for Europe and helped the euro move away from a nine-month low against the pound.

However, the movements were modest and the European Central Bank published a blog post highlighting one-off factors contributing to rising wages. Interest rate markets continue to price the chances of the ECB cutting interest rates next month at almost 90%.

Currency movements were muted early in the session in Asia and stock markets fell. China has begun a second day of war games around Taiwan. The Chinese yuan remained stable in offshore trading and is eyeing a weekly decline to 7.2858 per dollar.

The U.S. Dollar Index, which measures the dollar against a basket of six major currencies, was up nearly 0.6% for the week at 105.07, on track for its biggest gain in a week since mid-April.

Later today, traders will be watching final German GDP figures, UK and Canadian retail sales, US durable goods orders and speeches from ECB and Federal Reserve policymakers – including the Fed Governor Christopher Waller on long-term rates.

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