U.S. dollar drops as risk sentiment offsets demand
The dollar index is coming off its best weekly advance since mid-March
The U.S. dollar was marginally weaker on Monday, as risk sentiment outweighed safe haven demand after Iran and Israel halted strikes against each other following an appeal for calm from U.S. President Trump.
It is also a big week for currency market participants as key U.S. consumer and producer inflation data will arrive, potentially impacting central bank interest rate actions.
At 19:48 GMT, the U.S. dollar index was down 0.1% to 100.00.
The dollar index is coming off its best weekly advance since mid-March. A majority of that climb was driven by traders on Friday raising their expectations for U.S. central bank interest rate hikes after the May U.S. nonfarm payrolls report beat expectations.
The data, coming on the heels of other positive indicators on the labour market earlier in the week, suggested that the maximum employment part of the central bank’s dual mandate was under control and that the inflationary side was undoubtedly a bigger concern.
Until Friday, traders were willing to enjoy the promise of strong growth but without the prospect of much higher real interest rates. After Friday, the market’s growth-driven narrative may have given way to a real rates driven narrative. In that new narrative, ’good’ economic news may drive real interest rates higher, and be an impediment to high stock market multiples, Thierry Wizman, global FX and rates strategist at Macquarie, said.
As we’ve noted last week, the U.S.’s tight output gap and its sticky-high inflation were already calling for higher policy interest rates, according to various calibrations of the Taylor Rule. We’ve used this to build a case for the USD staying strong as the FOMC changes the policy bias toward ’tightening’ in June, and so long as crude oil price stay high, Wizman added.
A clearer picture of the impact of surging oil prices on Americans will come this week in the form of the U.S. consumer price index and producer price index reports due on Wednesday and Thursday, respectively.