. Dollar Slumps as Fed Rate Hike Expectations Fade - 14 April 2023

Dollar Slumps as Fed Rate Hike Expectations Fade – 14 April 2023

Dollar Slumps as Fed Rate Hike Expectations Fade – 14 April 2023

14 Apr 2023

The U.S. dollar experiences a decline to a one-year low due to cooled inflation in the U.S.

  • The US dollar faced a slump in early European trading on Friday as the Dollar Index fell to a one-year low of 100.515, down by 0.2%, due to expectations of an early end to the Federal Reserve’s rate-tightening cycle. Investors believe that cooler-than-expected inflation data will force the central bank to cut interest rates before the end of the year, resulting in a weaker dollar.
  • The Dollar Index is on track for a weekly decline of more than 1%, which is the steepest since January. This decline followed the release of the March US producer prices index, which fell by 0.5% from the previous month, marking the largest drop since the beginning of the pandemic.
  • The PPI slowed down on an annual basis, rising by 2.7% from a year ago, the smallest gain in more than two years. Excluding the volatile food and energy components, the core PPI fell by 0.1% from February and increased by 3.4% from a year ago. Consumer prices also posted the smallest annual increase since May 2021.
  • Although the Federal Reserve is still expected to raise interest rates next month, probably by just 25 basis points, there is a growing expectation that the central bank will be cutting interest rates before the end of the year.
  • According to analysts at ING, investors are looking forward to the forthcoming Fed easing cycle, and they have a conviction call that the dollar will weaken. Therefore, they are searching for opportunities. Friday brings more economic data, including the March retail sales release, which is expected to show a monthly contraction of 0.4%, the same as the prior month, as consumers struggle with inflation that is cutting into their disposable income.
  • The EUR/USD rose by 0.2% to 1.1069, hitting a fresh one-year high after data released on Thursday showed that German consumer prices remained elevated, pointing to the European Central Bank continuing to hike interest rates for longer than its US counterpart. The ECB needs to keep raising interest rates, said Governing Council member Pierre Wunsch on Thursday, and the market’s expectation for another 75 basis points of increases was “reasonable,” but expectations of a rate cut around the turn of the year were not.
  • “I think May will be about 25 or 50 basis points,” Wunsch said. “If there’s another upside surprise in core inflation and the (ECB’s quarterly) lending survey doesn’t look too bad, we might have to do 50.” There’s more inflation data to study Friday, with March consumer prices from France and Spain scheduled.
  • The GBP/USD rose by 0.1% to 1.2535, hitting a 10-month high, with the Bank of England expected to raise rates again in May. UK inflation remained in double digits, having surprised by accelerating to 10.4% in February. “The soft dollar story is keeping GBP/USD bid near 1.2500, and pressure seems to be building for a move to 1.2650/2750 – again driven from the dollar side,” ING added.
  • Meanwhile, AUD/USD traded largely flat at 0.6782, but the Aussie dollar was set for a 1.7% jump this week as a substantially stronger-than-expected employment report spurred increased bets that the Reserve Bank may yet raise rates higher. The USD/JPY fell by 0.1% to 132.50, while the USD/CNY fell by 0.5% to 6.8382, with the yuan helped by PBOC Governor Yi Gang reiterating the government’s 5% GDP target for 2023.