Dollar slides for second week as traders adjust Fed rate hike views

The dollar edged lower on Friday on its way to a second-straight weekly decline as traders pared expectations for US Federal Reserve interest rate hikes and as improving inflation and consumer spending data eased recession fears.

The dollar index, which measures the safe-haven currency against a basket of six other major currencies, fell as low as 101.43, its weakest since April 25. On a weekly basis, it was down 1.24 per cent, following a 1.45 per cent decline the previous week. At 3:10pm Eastern time (1910 GMT), the dollar was down 0.059 per cent at 101.66.

“We continue to think that the best of the broader USD rally is behind us now and while the USD may not fall significantly yet, further gains seem unlikely,” strategists from Scotiabank said in a client note.

The “Fed is fully priced and expectations for rate hikes later in the year may be subject to revision if the economy slows more quickly than expected,” they said.

The greenback hit a nearly two-decade peak above 105 earlier this month but has declined along with outlooks for the magnitude of likely Fed rate hikes this year, which have been fueled in part by fears over runaway inflation.

“The dollar is losing altitude as the view of the Fed pausing rate hikes in the fall gains traction,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Minutes from the Fed’s May meeting this week showed most participants believed 50 basis-point hikes would be appropriate at the June and July policy meetings, but many thought big, early hikes would allow room to pause later in the year to assess whether tighter policy is helping to tame inflation.

Although inflation continued to increase in April, it rose less than in recent months, data showed on Friday. The personal consumption expenditures (PCE) price index rose 0.2 per cent, the smallest gain since November 2020, after shooting up 0.9 per cent in March. For the 12 months through April, the PCE price index advanced 6.3 per cent after jumping 6.6 per cent in March.

Benchmark US Treasury yields were lower on Friday, but briefly bounced off session lows after the April inflation figures, which boosted hopes that the worst of soaring price pressures has passed.

A separate report showed US consumer spending rose more than expected last month as households boosted purchases of goods and services.

Next week’s key US report will be the nonfarm payrolls numbers for May at the end of the week.