Dollar edges higher; solid bank results lift Fed hike expectations

Dollar edges higher; solid bank results lift Fed hike expectations


By Peter Nurse – The U.S. dollar edged higher in early European trade Monday, bouncing off last week’s one-year low after strong earnings from some of Wall Street’s banking giants diluted concerns about the sector, raising expectations of another interest rate hike by the Federal Reserve.

At 01:55 ET (05:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.360.

The index posted its fifth straight weekly loss on Friday, when it fell to a new one-year low of 100.78 in the wake of the U.S. producer prices index recording the biggest drop since the start of the pandemic.

With inflation cooling quickly and the Fed policy makers expressing concerns that weakness in the banking sector could result in a “mild recession” this year, traders had begun to factor in a pause in the central bank’s rate-hiking cycle in May.

However, Friday saw the release of a strong set of first-quarter 2023 earnings from JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC), lifting concerns about the banking crisis that unfolded last month.

Additionally, Federal Reserve Governor Christopher Waller called for more monetary policy tightening to reduce persistently high inflation.

“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday.

In the next few days, investors will have a final chance to hear from more Fed officials before they enter their traditional blackout period ahead of the meeting, including New York Fed President John Williams, Governor Michelle Bowman, and Governor Lisa Cook.

Most investors now expect the Fed will hike rates another 25 basis points at its next policy meeting on May 3.

EUR/USD fell 0.1% to 1.0991, retreating from the one-year high seen last week, but the single currency remains in demand given the widely-held expectations that the European Central Bank will continue hiking interest rates for longer than its U.S. counterpart amid fears rapid price growth is at risk of becoming entrenched.

“I do not think that our job is already – or even mostly – done,” ECB Governing Council member Joachim Nagel said on Friday. “Rather, in my opinion, further interest rate hikes will be required.”

The ECB has raised rates by at least 50 basis points at each of its past six meetings, and is expected to do something similar in May.

GBP/USD rose 0.1% to 1.2419, with the U.K. set to release February employment data on Tuesday, followed by March inflation data a day later, which could determine whether Bank of England officials decide to hike interest rates by another 25 basis points at their meeting next month.

Elsewhere, AUD/USD edged higher to 0.6711, ahead of Tuesday’s release of the minutes of the Reserve Bank’s April meeting, while USD/JPY rose 0.2% to 133.99.

USD/CNY traded flat at 6.8718, ahead of a key reading on first-quarter economic growth due on Tuesday.


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