The U.S. dollar gained for the fourth consecutive session on Thursday as the market’s expectations about a longer monetary tightening cycle by the Federal Reserve increased.
The dollar index gained 0.43 percent to 104.280 after earlier reaching 104.31, the highest since March 14. The four-day gaining streak was the longest consecutive rally for the index since late February.
The euro lost 0.31 percent against the greenback to trade at $1.0715 after trading at $1.0752 in the previous session. Recent news about a recession in Germany triggered euro sell-offs in the forex market, according to analysts. Germany, the largest economy in Europe, posted a 0.3 percent decline in gross domestic product (GDP) during the year’s first quarter.
The Japanese yen also weakened by 0.52 percent versus the dollar to 140.16, while the U.K. pound sterling lost 0.43 percent to trade at $1.2311.
Analysts explained that the prospect of further rate hikes made investors turn to the U.S. dollar for its perceived store of value.
“We are definitely not seeing that recession that everybody was talking about coming in 2023, so with those kind of bets being pulled off, the rates are creeping higher at this point.”
Erik Bregar, Silver Gold Bull director of FX & precious metals risk management
Economic reports, officials’ comments
The increased expectations for prolonged monetary tightening happened after several economic reports indicated that the U.S. economy remained resilient despite the central bank’s consecutive rate hikes since March last year.
An estimate of first-quarter GDP growth in the U.S. showed that the economy grew more slowly during that period, but the growth was revised up to 1.3 percent from the earlier estimate of 1.1 percent. Earlier this month, the Atlanta Fed also projected that the GDP growth in the second quarter was 2.9 percent, against the initial prediction of 2.6 percent.
Initial unemployment claims increased by 4,000 last week to 229,000, while the Labor Department revised data from the prior week to show 17,000 fewer applications. The data proves that the U.S. labor market remained resilient, which can lead to strong wage inflation, according to analysts. Wage inflation is a major contributing factor to soaring consumer prices because it fuels spending.
Some Fed voting members have commented about the central bank’s future monetary policy. Fed governor Christopher Waller said a rate hike pause was possible in the upcoming Federal Open Market Committee meeting. However, he also noted that it would not be the end of the tightening cycle as he argued that there was a “lack of progress” in slowing down inflation.
Meanwhile, Boston Fed President Susan Collins said Thursday that it might be the appropriate time for the central bank to pause the tightening campaign. Tom Barkin, president of the Richmond Fed, said the U.S. central bank is currently in a “test and learn” stage in slowing inflation.
The Fed last hiked the country’s interest rate by a quarter of a percentage point, bringing the federal funds rate to the range of 5.00 to 5.25 percent. Fed officials have asserted that they aim to lower inflation to the two percent target.
Fed fund futures now predict a 53 percent probability that the Fed will increase the country’s benchmark rate by 25 basis points at its June meeting, up from 36 percent on Wednesday.
The debt ceiling debate in the Capitol has also supported the dollar over the past weeks. Sources said that U.S. President Joe Biden and Rep. Kevin McCarthy would soon close a deal to cut federal spending.