US dollar holds seven-week high

The dollar held a seven-week peak on Friday, as another round of data showing still-high inflation reinforced expectations that interest rates could stay higher for longer.

Hotter-than-expected data has helped the greenback to strengthen against many of its major peers this week, sending the dollar index up 0.6 per cent at 105.20 to a seven-week high and putting it on track to post its largest weekly gain since late September.

The euro was also on pace to post its biggest weekly loss against the dollar since late September.

Stoking the dollar’s recent surge is the personal consumption expenditures (PCE) price index, tracked by the Federal Reserve for monetary policy, which rose 0.6 per cent last month after gaining 0.2 per cent in December. The PCE price index accelerated 5.4 per cent in the 12 months through January, after rising 5.3 per cent in December.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.8 per cent last month, according to the Commerce Department. December’s data was revised higher to show spending dipping 0.1 per cent instead of falling 0.2 per cent as previously reported. Moreover, sales of new US single-family homes increased 7.2 per cent in January, the highest level since March 2022. December’s sales pace was revised higher to 625,000 units from the previously reported 616,000.

“Strong US data have completely turned the market in February. Good news has been bad news, with rates and equities selling off and the US dollar up. The US economy seems to be re-accelerating, forcing the Fed to hike more, in a market that was hoping for early Fed pivot,” said Athanasios Vamvakidis, global head G10 FX strategy at Bank of America in London.

“Unemployment remains historically low in every single G10 economy and has yet to increase in any of them during monetary policy tightening so far,” Vamvakidis added. “The market’s reality check will be complete when both good news and bad news are bad news, which should be the case when inflation is high and sticky, and the Fed committed to bringing it down.”

Fed funds futures traders are now pricing the Fed funds rate to hit a peak of 5.395 per cent in September, and expect it to stay above 5 per cent for the year, compared with the current target rate of 4.5-4.75 per cent. The markets have also priced in rate hikes over the next three meetings.

Against the yen, the dollar hit a two-month high and was last up 1.3 per cent at 136.41 yen. The US currency also rose to its strongest level in seven weeks versus the Swiss franc following the data. The dollar last traded at 0.9406 francs, up 0.7 per cent.

The euro was last down 0.39 per cent against the greenback at $1.0549, after falling to a seven-week low of $1.0536 earlier in the session. Sterling softened 0.60 per cent against the dollar at $1.1951.

Amo Sahota, director at Klarity FX in San Francisco, said that while the dollar is on a good run because of the PCE data, it is unlikely to be racing too far ahead of the pack like before.

“I still think the yield spread advantage in a lot of those emerging markets is making it more attractive. That’s why the Mexican peso is kind of outperforming. I think that some of that will still stay. I don’t think we’re going to go straight into the exodus and drive into the US dollar at the same pace that we were doing last year,” Sahota said.