Dollar steadies ahead of U.S. growth

04:32 PM @ Thursday - 30 May, 2024

The U.S. dollar steadied in early European trade Thursday near two-week highs, supported by rising yields and rising conviction the Federal Reserve will not cut interest rates anytime soon.

At 04:35 ET, the Dollar Index, which tracks the greenback against a basket of six other currencies, slipped marginally lower to 104.940, having earlier reached the highest since May 14 at 105.17, following a 0.5% advance in the prior session.

Safe haven dollar in demand
A spate of stronger-than-expected economic data, hawkish comments from a number of Fed officials and a run of poorly received auctions have seen bond yields rise sharply, spurring a rush to the safest assets and boosting the dollar.

Conviction is growing that the Fed will not cut interest rates any time soon, and traders are waiting for confirmation from Friday’s PCE price index data, the Fed’s preferred inflation gauge, that inflation remained sticky through April.

Ahead of that, a revised reading on first quarter gross domestic product is due later Thursday, and is expected to show continued resilience in the U.S. economy. Strength in the economy gives the Fed more headroom to keep rates high for longer.

“A series of softer US Treasury auctions and a sell-off in the longer end of the bond market is weighing on risk assets and providing some support to the dollar,” said analysts at ING, in a note.

“This may well just be a short-term swing ahead of Friday's key US data release, but it is a trend worth watching.”

Euro bounces off two-week low

In Europe, EUR/USD traded 0.1% higher to 1.0810, bouncing off a two-week low ahead of the release of eurozone business confidence data later in the session and then the eurozone CPI release at the end of the week.

“Some modest improvement is expected across the board, but as we saw with Monday's German IFO release, the pick-up in sentiment looks likely to be more modest than euphoric,” analysts at ING said.

The European Central Bank is widely expected to announce an interest rate cut next week, but uncertainty over what follows could be influenced by Friday’s inflation release.

GBP/USD fell 0.1% to 1.2697, after sterling fell to a two-month low during the previous session.

Yen gains ahead of Tokyo inflation report

In Asia, USD/JPY traded 0.4% lower to 157.03, but the pair remained close to recent highs, amid sustained weakness in the yen.

Focus was now squarely on an upcoming inflation reading from Tokyo, due on Friday, for more cues on the Japanese economy. Any signs of increasing inflation could bring some relief to the yen.

USD/CNY traded 0.1% lower at 7.2461, amid mounting pressure from concerns over a sluggish Chinese economy.

Purchasing managers index data from China is due on Friday.    –