Dollar Strengthens as US Inflation Figures Surpass Expectations
Highest Weekly Performance for Dollar Since 2022
The dollar achieved its strongest weekly performance in a decade after US inflation figures exceeded expectations, causing ripple effects in global markets. Since Monday, the US currency has strengthened by 1.7% against a basket of six major currencies. This surge represents the most significant weekly gain for the dollar since September 2022, as traders adjusted their bets on the Federal Reserve’s interest rate cuts expectations.
Euro and Sterling Sink to New Lows
The euro and sterling both experienced their weakest levels against the dollar since November. On Friday, the euro reached $1.0642, while sterling hit $1.245. Additionally, the yen plummeted to a 34-year low against the dollar, later recovering to ¥153.28. Factors contributing to the decline include the loose fiscal policy in the US, followed by tight monetary policy, which contributes to strengthening the dollar in its own unique way.
Impact on UK Stocks and the FTSE 100
Sterling’s decline played a part in the 0.9% rise in UK stocks on Friday. FTSE 100, which consists of companies with substantial revenues in dollars, nearly recorded a record-high closure. Quentin Fitzsimmons, a senior portfolio manager at T Rowe Price, explains, “The US is its own special case with very loose fiscal policy and now tight monetary policy, which is a recipe for a stronger dollar. The buzzword currently circulating in the market is divergence.”
US Consumer Price Inflation and the Federal Reserve’s Response
US consumer price inflation for March reached an unexpected 3.5%, sparking increased bets among traders that the Federal Reserve may deliver only one rate cut in the coming year. Contrastingly, at the beginning of January, market expectations reflected as many as six quarter-point cuts. This week’s inflationary data prompted traders to adjust their earlier predictions.
ECB and Eurozone Interest Rate Cuts
The European Central Bank (ECB) indicated that it remains on track to deliver interest rate cuts in June. The growing belief that eurozone interest rates will decrease earlier than those in the US has put additional pressure on the euro. As a result, the euro has experienced its most substantial weekly decline since September 2022.
Heightened Geopolitical Tensions and the Dollar’s Haven Status
Analysts suggest that the dollar’s recent robust performance may also be attributed to rising tensions between Iran and Israel, amidst concerns of a potential attack on Israel in response to an airstrike on Iran’s consulate in Syria. The dollar is considered a haven for investors during times of heightened geopolitical uncertainty.
Implications for Central Banks and Currencies
Sustained dollar strength may pose challenges for countries aiming to reduce interest rates while maintaining stable currencies and preventing accelerated price rises. Moreover, fluctuating oil prices, with Brent crude surpassing $92 per barrel, further complicate currency outlooks, bringing forth concerns of a widening Middle East conflict.
The Policy Gap and Vulnerability of the Yen
Japan’s currency, the yen, has been the most affected by the surging US rate expectations, reaching its lowest level since 1990. This development has raised concerns among Japanese authorities, prompting Vice-Minister for Finance Masato Kanda to state that they won’t rule out any measures to address excessive moves in the exchange rate. However, some experts view any intervention as expensive and temporary, as the policy gap between the US and Japanese central banks remains significant.
