The US Dollar Has Hit a Seven Week High on High Inflation Data
On Friday, the dollar reached a seven-week high as another set of data showing continued strong inflation bolstered predictions that interest rates will remain high for longer. Hotter-than-expected data has helped the dollar appreciate versus several of its major counterparts this week, bringing the dollar index to a seven-week high of 105.20 and putting it on course for its highest weekly gain since late September.
The euro was also on track to suffer its worst weekly loss versus the US dollar since late September. The personal consumption expenditures (PCE) price index, which the Federal Reserve uses to determine monetary policy, jumped 0.6% last month after rising 0.2% in December.
The PCE price index increased 5.4% in the year to January, following a 5.3% increase in December. According to the Commerce Department, consumer spending increased by 1.8% last month, accounting for more than two-thirds of all economic activity in the United States. The December statistics were revised upward to reflect that expenditure fell 0.1% rather than decreasing 0.2% as previously reported.
Moreover, sales of new single-family houses in the United States climbed 7.2% in January, the highest level since March 2022. The December sales rate was revised up to 625,000 units from 616,000 before. "Positive statistics from the United States flipped the market in February.
Rates and stocks have fallen as a result of good news, while the US dollar has risen. In a market that was expecting an early Fed pivot, the US economy appears to be re-accelerating, compelling the Fed to raise further "Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America in London, confirmed this.
"Unemployment is historically low in all G10 economies and has yet to rise in any of them amid monetary policy tightening," Vamvakidis remarked. "When both good and bad news is terrible news, the market's reality check will be complete, which should be the situation when inflation is high and sticky and the Fed is dedicated to driving it down.
" Fed funds futures traders now expect the Fed funds rate to peak at 5.395% in September and to remain over 5% for the rest of the year, compared to the current target range of 4.5-4.75%. Markets have also factored in rate increases over the following three sessions. The dollar reached a two-month high against the yen and was last up 1.3% at 136.41 yen.
Following the release of the statistics, the US dollar surged to its highest level in seven weeks against the Swiss franc. The dollar was last worth 0.9406 francs, up 0.7%. The euro was recently down 0.39% versus the dollar, trading at $1.0549 after hitting a seven-week low of $1.0536 earlier in the session.
The Sterling fell 0.60% versus the US dollar to $1.1951. According to Amo Sahota, director of Klarity FX in San Francisco, while the dollar is on a nice run as a result of the PCE data, it is unlikely to be racing too far ahead of the pack as it was previously. "I still believe that the yield spread advantage in many of those emerging economies makes it more appealing.
That is why the Mexican peso has outperformed. Some of that, I believe, will remain. I don't think we'll jump right into the exodus and push into the US currency at the same rate we did last year "Sahota stated.