The dollar surged this week, marking its largest weekly rise in over a month. Surprisingly strong U.S. economic data has left markets on edge about the outlook for U.S. inflation and interest rates.
In May, U.S. business activity accelerated to its highest level in just over two years. Manufacturers reported surging input prices, causing a pullback in U.S. interest rate cut expectations and a rise in government bond yields.
This development has driven the dollar up almost 1% against the Japanese yen, reaching 157.11 yen. Despite Japanese government bond yields climbing to decade highs, clearing 1% at the ten-year tenor, the yen has remained relatively unaffected.
Japan’s core inflation slowed for a second consecutive month in April, meeting market expectations at 2.2%. However, this has had minimal impact on the yen.
Policymakers’ cautious rhetoric on inflation and the distant or minimal rate cuts have added to traders’ nervousness.
The Australian dollar faded to $0.6592 on Friday, failing to hold a key $0.6650 chart level. This left it down 1.4% for the week and well below the recent four-month high of $0.6714.
The New Zealand dollar has been supported by a hawkish outlook from the Reserve Bank of New Zealand but remains 0.6% weaker for the week at $0.6098.
The euro saw a modest rise from a nine-month low against the pound on Thursday after a key European wage indicator picked up. However, the moves were modest as the European Central Bank highlighted one-off factors contributing to the wage rise.
Rates markets still price a near 90% chance the ECB will cut rates next month. The euro traded at $1.0809 in Asia, down 0.5% for the week.
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The U.S. dollar index, which measures the dollar against a basket of six major peers, was up nearly 0.6% for the week at 105.1, on course for its largest one-week rise since mid-April.
Traders will keep an eye on final German GDP figures, British and Canadian retail sales, U.S. durable goods orders, and speeches from ECB and Federal Reserve policymakers, particularly Fed Governor Christopher Waller on longer-term rates.
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