The dollar is Rising as Investors Focus on Inflation Data
The dollar rose broadly on Friday as investors remained risk-averse ahead of next week's U.S. inflation data, with concerns about an economic slowdown and the pace of the Federal Reserve's rate increases dampening sentiment. The dollar index, which compares the safe-haven US currency to six major peers, rose 0.155% to 103.34 after falling 0.24% the previous session.
The index is poised to post a weekly gain, its second consecutive positive week, and its longest winning streak since October. The euro was down 0.15% to $1.072, heading for a second straight week of losses, while the pound was last trading at $1.2093, down 0.24% on the day ahead of fourth-quarter GDP data.
In the absence of key data and Federal Reserve speakers, OCBC currency strategist Christopher Wong believes the foreign exchange market will trade sideways on Friday, focusing on inflation data due next week. "The Fed is doing policy calibration in the broad picture... but there is caution in the near term, given recent Fed speakers and how the disinflation trend may be bumpy." In the meantime, the yen fell 0.12% to 131.74 per dollar. According to Reuters, Japan's government intends to present the new Bank of Japan governor nominee and two deputy governor nominees to parliament on February 14.
According to data released on Friday, wholesale prices in the country rose 9.5% year on year in January, adding to signs of inflationary pressures that could put the central bank under pressure to phase out its massive stimulus program. The Australian dollar fell 0.20% to $0.692, while the New Zealand dollar fell 0.24% to $0.631 against the US dollar. The Fed raised interest rates by 25 basis points last week and said it was seeing signs of disinflation, but a massive jobs report shook investors, who feared policymakers would remain hawkish for much longer. In his speech this week, Fed Chair Powell reiterated his belief that disinflation was underway.
Richmond Fed President Thomas Barkin said on Thursday that tight monetary policy was "unmistakably" slowing the US economy, allowing the Fed to move "more deliberately" with any future interest rate increases. The yield on 10-year Treasury notes fell 1.6 basis points to 3.667%, close to the month high of 3.692% reached on Wednesday. A closely watched part of the U.S. Treasury yield curve measuring the difference between two-year and 10-year Treasury notes, viewed as an indicator of economic expectations, was at -82.5 basis points, having inverted as far as -88 basis points, the most in nearly two months. The deep inversion in this part of the yield curve indicates that a recession is imminent.
Next week's CPI data in the United States will be closely watched by investors to see if disinflation is taking place. "The market is more data-dependent following last Friday's spectacular US jobs report," DBS senior currency strategist Philip Wee said. Wee said the Fed has signaled that more surprises in the inflation and jobs reports before its next meeting in March could lead the central bank to raise its rate forecast for this year above the 5.1% it projected in December. "With the Fed possibly joining other central banks in delivering more hikes, the greenback has leveled off this month," Wee said.