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The dollar posted its strongest weekly performance since 2022 as higher-than-expected U.S. inflation sent ripples through global markets.
The U.S. currency has gained 1.7% against a basket of six currencies since Monday, its best weekly performance since September 2022, as traders withdrew bets that the Federal Reserve would cut interest rates early. did.
On Friday, the euro and pound fell against the dollar to their lowest levels since November at $1.0642 and $1.245, respectively, while the yen fell to a 34-year low before recovering to 153.28 yen.
A weaker pound also contributed to a 0.9% rise in British shares on Friday, as the FTSE 100 index, whose constituent companies earn most of their revenue in dollars, closed the day short of a record close.
“The U.S. is a special case with very accommodative fiscal policy and now tight monetary policy, which is contributing to the dollar's strength,” said Quentin Fitzsimmons, senior portfolio manager at T. Rowe Price. ” “The buzzword in the market right now is divergence.”
This week's rise in U.S. consumer price inflation (to 3.5%, higher than expected in March) has traders betting that the Fed may cut rates just once this year. I'm strengthening it.
This compares with expectations for a rate cut of up to six quarter points in early January.
The European Central Bank signaled on Thursday that it remains on track to cut interest rates in June. Expectations are growing that interest rates in the euro zone will fall ahead of those in the United States, increasing pressure on the euro.
As of Friday afternoon, the currency was down 1.8% on the week, the biggest weekly decline since September 2022.
“The ECB's divergence appears to have been a blessing in disguise, causing the euro to weaken against the dollar,” said Chris Turner, head of global markets at ING.
The shift in sentiment widened the benchmark 10-year government borrowing cost spread, or gap, between the U.S. and Germany to 2.17 percentage points, its highest level since 2019.
Reports on Friday that the country's inflation rate was lower than expected increased speculation that the Riksbank could cut interest rates as early as May.
Concerns about an impending Iranian attack on Israel following the airstrike on the Islamic Republic of Syria's consulate may also have contributed to the dollar's recent strength, analysts said.
“Rising tensions between Iran and Israel could spill over into further increases in oil prices, all to the dollar's benefit in the short term,” said Francesco Pesole, a currency analyst at ING. .
The dollar is seen as a haven asset for investors during times of heightened geopolitical uncertainty.
If the dollar continues to rise, it could create problems for countries looking to cut interest rates without hurting their currencies or accelerating price increases.
The outlook is complicated by soaring oil prices, with Brent crude hitting $92 a barrel for the first time since October on Friday, amid growing concerns about escalating conflict in the Middle East.
“Other central banks clearly don't want their currencies to depreciate significantly… What that means is that it will effectively lead to more inflation,” said Jupiter Asset. said James Novotny, portfolio manager at Management.
Markets expect the ECB to cut rates by at least three quarter-points by the end of the year, compared with just two for the Bank of England and one or two for the Fed.
The Japanese currency has been hit hardest by rising U.S. interest rate expectations, pushing the yen to its lowest level since 1990 and leaving the Treasury on guard against possible intervention.
Masato Kanda, Japan's vice-minister for international finance, told reporters on Thursday that authorities would not rule out any measures to address excessive exchange rate fluctuations.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said the impact of the intervention would be expensive and temporary.
“The yen has been damaged by the Japanese government's policies. [Bank of Japan], that is too permissive,” he said. “The yen remains vulnerable precisely because the policy gap remains painfully wide.”
