The Dollar is Soaring, Poised to Report its First Monthly Yield as of September
In choppy trading on Tuesday, the dollar edged up against the major currencies, on track for its first monthly gain since September, as investors remained on edge due to recession fears and expectations that interest rates will remain high for some time to come.
The dollar rose in February in hopes that the Federal Reserve would have to raise interest rates more aggressively and for a longer period than the market had initially anticipated combating inflation.
Recent encouraging data, such as a record-breaking employment report for January, contributed to this rally. The Federal Reserve's target policy rate is expected to peak at 5.4% in September, according to U.S. rate futures, while rate reductions this year are largely discounted.
The target range for the Fed's policy rate is currently between 4.50% and 4.75%. At 3:20 p.m. ET (2020 GMT), the dollar index, which compares the value of the dollar to a basket of other currencies, was up 0.22% at 104.88, on pace for a monthly gain of 2.7%.
Data released on Tuesday, however, indicated that the Fed's rate increases were starting to have the desired impact of bringing down the economy's blazing heat, which slightly weakened the dollar.
According to José Torres, senior economist at Interactive Brokers, "amid the sea of depressing news, U.S. consumer confidence data released this morning was ice cold, favorable for fighting inflation, but at a significant implied cost — declining consumer spending, which represents approximately 70% of the country's GDP."
Consumer confidence in the United States unexpectedly decreased in February, falling to 102.9 from a reading of 106 in January. Reuters polled economists, who predicted that the index would be 108.5.
According to a different report, the S&P CoreLogic Case Shiller national home price index rose 5.8% year over year in December, the slowest annual growth rate for single-family home prices in the United States since the summer of 2020. Additionally, the February results of the Chicago PMI business survey were weaker than predicted.
The consumer price index and February employment figures, both of which could have an impact on the Fed's interest rate policy, are due out on March 10 and 14, respectively.
"The tale of deflation is still unfolding. Although there was a brief pause in January, there was no reversal. We believe some aspects of the dollar's strength are overstated.
Therefore, we are cautiously fading the dollar's strength "said UBS FX strategist Vassili Serebriakov. Before the U.S. data, the dollar on Tuesday reached a high of more than two months against the Japanese yen, rising to 136.93 yen.
At 136.15, the dollar was last down 0.06% to the yen. Japan's policy of maintaining low yields makes the yen vulnerable to changes elsewhere. Kazuo Ueda, the new governor of the Bank of Japan (BOJ), stated this week that it is too soon to make predictions about the direction of the central bank's policy.
On Tuesday, the BOJ's ultra-loose monetary policy was dismissed by the newly appointed deputy governor, Shinichi Uchida. In comparison to the euro and the pound, the yen also hit two-month lows. In other news, the euro fell 0.25% to $1.0583 against the dollar.
Higher-than-expected French inflation data earlier gave it some support, sending short-dated euro zone yields to their highest level in at least ten years. Sterling, meanwhile, lost some of the gains it had made against the dollar in the previous session, falling 0.09% to $1.2052.
It increased by 1% on Monday after the announcement of the Windsor Framework, a new agreement between the UK and the EU for post-Brexit trading arrangements for Northern Ireland. British Prime Minister Rishi Sunak said that would open the door for a new chapter in London's relationship with the bloc, which improved the outlook for the UK economy after Brexit.