The dollar on Thursday was poised for its biggest monthly gain in nearly a year, ahead of U.S. inflation data that could bolster investor confidence in a Federal Reserve rate hike at least once this year.
On Wednesday, the dollar hit a 13-month high against the euro, pushing the single European currency below 1.14 dollars. The dollar’s strength also drove the pound sterling to a seven-month low and kept the Japanese yen at its weakest level in 40 years, around 161.9. The strengthening dollar briefly pushed gold below 4,000 dollars per ounce for the first time in over seven months and bitcoin below 60,000 dollars for the first time since 2024. The dollar index, which measures the U.S. currency against a basket of six others, was around 101.5 on Thursday, after reaching a 13-month peak of 101.8 the previous day.
Traders, who prior to the U.S.-Israel conflict with Iran expected the Fed to cut rates this year, now anticipate a hike as early as October and a 50/50 chance of a second increase by year-end. This month, U.S. two-year Treasury yields, which reflect short-term rate expectations, have risen by 14 basis points to 4.16%. In contrast, the benchmark yield on two-year German bonds has increased by only 2 bps to 2.56%, while the yield on British government bonds has fallen by nearly 9 bps.
MUFG currency strategist Lee Hardman stated that the rates market clearly reflects investor confidence that the Fed will “back up tough talk on inflation with rate hikes this year.” He added: “If the Fed is serious about restoring price stability, a significant tightening of monetary policy will be necessary, so it makes sense that more hikes have been priced in, which has recently contributed to the strengthening of the U.S. dollar.”
Upcoming U.S. inflation data
Meanwhile, data on the Fed’s preferred inflation measure—the core personal consumption expenditures price index for May—are anticipated. Economists polled by Reuters expect a rise of 3.4%, well above the central bank’s target of 2%.
The pound sterling fell by 0.1% to 1.316 dollars, hitting a low of 1.314 dollars on Wednesday, its lowest level since last November. The dollar retreated against the Swiss franc to around 0.813 francs, just slightly below 11-month highs.
President of analytics firm Spectra Markets Brent Donnelly noted that “further strengthening of the U.S. dollar will require further widening of rate differentials, but in the short term, corporations need dollars, and they will need them for a few more days.” “In my view, this creates a positive feedback loop for the U.S. dollar, where speculators add on and technical levels break, and this feedback loop is likely to exhaust itself soon,” he added.
Further gains in the dollar could also prompt Japan to act on threats to intervene to support the yen. Traders believe intervention will be triggered at levels around 162 yen per dollar or higher. SMBC currency strategist in Tokyo Hirofumi Suzuki said that “given the buildup of short positions in the yen, we expect a significant impact if intervention is carried out.”
Source: Yahoo