U.S. Dollar Retreats As Markets Re-assess Fed Rate Path

U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. Reuters / DADO RUVIC

The U.S. dollar slipped on Friday and posted its first weekly decline this month, as traders pared back bets on where interest rates may peak and brought forward their outlook on the timing of rate cuts to counter a possible recession.

A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the dollar against major currencies.

"Falling commodity prices could help pull headline inflation prints downward - particularly into the autumn months - reducing the need for aggressive monetary tightening," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

U.S. fed funds futures on Friday priced in a 73% probability of a 75 basis-point increase at the July meeting. But for September the market has fully factored in just a 50-bps rise.

The market has also priced in a fed funds rates of 3.31% on Friday, from 3.51% a week ago.

In afternoon New York trading, the dollar index, which measures the U.S. unit against six major currencies, fell 0.2% to 104.013.

The safe-haven greenback slipped further after data showed new home sales jumped 10.7% to a seasonally adjusted annual rate of 696,000 units last month. May's sales pace was revised higher to 629,000 units from the previously reported 591,000 units.

The University of Michigan consumer sentiment survey showed mixed results, with sentiment worsening in June to 50, from a final reading in May of 58. But the reading on five-year inflation expectations eased to 3.1 from the preliminary 3.3% estimate in mid-June.

The dollar, up around 9% this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5% and falling nearly 20 bps by July 2023.

Graphic: Peak rates-

This rate hike repricing sent 10-year Treasury yields to two-week lows, while the dollar index has lost 0.5% this week.

For now though, Fed Chair Jerome Powell stressed the central bank's "unconditional" commitment to taming inflation. Fed Governor Michelle Bowman also supported 50 bps hikes for "the next few" meetings after July.

Analysts noted terminal rate repricing across the developed world as recession fears grow.

"The Fed has said it will do its best to bring down inflation without dealing a significant blow to the economy," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.

"But if a soft landing should ultimately prove elusive, then the Fed would likely have to change course and start to slash rates. So while the rate debate remains fluid, for now inflation fears have given way to hopes of looser policy if things really deteriorate."

The Japanese yen, sensitive to changes in U.S. yields, was down 0.2% at 135.20 per dollar.

The euro rose 0.3% to $1.0553.

The greenback's slide boosted even commodity-focused currencies such as the Australian dollar and Norwegian crown. The Aussie rose 0.8% to US$0.6946, and posted its weekly gain after two straight weeks of losses.

The Norwegian crown, fresh off Thursday's 50 basis-point rate hike, was up 1.2% at 9.8495 per dollar.

The euro fell to its lowest since early March against the Swiss unit at 1.0052 francs. It was last flat at 1.0118 francs .

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Currency bid prices at 4:13PM (2013 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.1100 104.4000 -0.27% 8.830% +104.5100 +103.9400

Euro/Dollar $1.0554 $1.0523 +0.30% -7.16% +$1.0571 +$1.0513

Dollar/Yen 135.1850 134.9700 +0.17% +17.44% +135.3900 +134.3600

Euro/Yen 142.68 141.98 +0.49% +9.48% +142.7700 +141.4300

Dollar/Swiss 0.9584 0.9611 -0.27% +5.08% +0.9632 +0.9522