Dollar Drops to One-Month Low; Fed Hiking Expectations Ease

© Reuters.

By Peter Nurse

Investing.com - The U.S. dollar weakened in early European trade Friday, sinking to a one-month low on rising expectations that the Federal Reserve’s tightening cycle could be relatively short-lived.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.650, dropping close to the lowest level seen since April 25 and on course for a fall of around 1.5% this week.

Additionally, EUR/USD rose 0.2% to 1.0742, GBP/USD rose 0.2% to 1.2621, both pairs climbing to levels not seen since late April, while the risk-sensitive AUD/USD climbed 0.4% to 0.7128 and NZD/USD jumped 0.4% to 0.6505.

The dollar climbed to a near 20-year high earlier in the month but has retreated amid signs that monetary policy tightening may already be slowing economic growth.

Data released Thursday showed that the U.S. economy shrunk by slightly more than initially estimated in the first quarter of the year, as gross domestic product contracted at an annualized pace of 1.5%, rather than the 1.4% preliminary reading.

Additionally, the minutes from the early May Fed meeting, released Wednesday, indicated that the central bank policymakers may be prepared to slow or even pause its tightening cycle in the second half of the year if inflation levels start to retreat.

Attention will now turn to the release of the personal consumption expenditure index, due later Friday, with the core version of this index, which excludes the volatile food and energy elements, being the Fed’s primary gauge of inflation. This index is expected to fall to an annualized 4.9% in April, from 5.2% the previous month.

“Pricing of the Fed tightening cycle has corrected 25-35bp lower since early May,” said analysts at ING, in a note, “but Fed speak and the US, data calendar suggests those higher levels for the Fed terminal rate could easily be put back into the market - which is dollar supportive.”

Elsewhere, USD/TRY rose 0.1% to 16.3826 after Turkey’s central bank left interest rates unchanged for a fifth month on Thursday, resulting in deeply negative rates when inflation is taken into account.

This has hit the lira, with the Turkish currency the worst performer in emerging markets so far in 2022 with a loss of about 19% against the dollar.

USD/CNY edged lower to 6.7379 after industrial profits at Chinese firms shrank last month for the first time in two years, dropping 8.5% in April from a year earlier, as COVID outbreaks and lockdowns disrupted economic activity.