The U.S. dollar gained over the euro on Thursday after the European Central Bank or ECB announced a 25-basis-point rate hike.
The euro zone’s currency lost 0.41 percent to trade at $1.1018 after hitting a 13-month high of $1.096 the previous week. The euro has rallied against the dollar since mid-April because of the expectation of a smaller interest rate gap between the two currencies.
Investors initially expected the ECB to deliver a 50-basis-point increase at Thursday’s meeting. The market also previously forecast the central bank to increase the benchmark rate further, with the International Monetary Fund suggesting the ECB continue its monetary tightening campaign until mid-2024. However, the central bank has indicated a potential hike pause in the near future after the recent rate increase.
The dollar index gained 0.15 percent for the day at 101.3600. It previously fell by 0.42 percent at 101.42 after the U.S. Federal Reserve decided on a quarter-of-a-percentage-point rate increase and signaled a hike pause.
Against the Japanese yen, the dollar fell by 0.34 percent to 134.17. It also declined against sterling, with the U.K. currency posting a 0.10 percent gain at $1.2580. The dollar also lost 0.87 percent against the Norwegian crown after Norges Bank decided to increase Norway’s benchmark rate by 25 basis points as expected.
Scotiabank FX strategist Shaun Osborne said the dollar got “a bit of a push up” after new data showed that U.S. Unit Labor Costs — the cost of labor per one unit of output — grew at a 6.3 percent rate in Q1 2023, a significant increase from a 3.3 percent growth pace in the previous quarter. Osborne said the reading did “not really commensurate with the Fed on hold story.”
Market turns attention to Fed’s future policy
The global financial market is now re-directing attention to the Fed’s future rate policy decisions after the ECB news, according to Osborne.
“The monetary policy dynamics are more or less fully priced in here at this point in terms of the tightening cycle, now it’s going to be a focus on the bets on when the Fed starts to ease, how much it eases and how that relates to what (other) central banks are doing.”
Shaun Osborne, Scotiabank FX strategist
Fed chairman Jerome Powell said Wednesday that the central bank had omitted language that indicated further rate increases from its meeting results. The chairman also said that officials would monitor incoming data to see whether a rate hike would be “appropriate.”
Investors are currently anticipating the U.S. jobs report for April, which is expected to show additional 180,000 jobs in the nonfarm sector. The market forecasts average earnings to grow by 4.2 percent year-over-year for the month.
Fed fund futures now predict a 62 percent chance that the Fed will start cutting the interest rate in July, earlier than the previous consensus of September. Analysts said the growing concerns regarding the U.S. banking sector would push the Fed to begin cutting the rate sooner.
The U.S. banking sector experienced volatility in March after two regional lenders, Silicon Valley Bank and Signature Bank, collapsed. Analysts have pointed out that some other regional banks also experienced similar liquidity issues that forced the two lenders to shut down.
Shares of PacWest Bancorp and Western Alliance Bancorp plunged by 50.62 percent and 38.45 percent, respectively, after reports suggested that the two regional banks were exploring “strategic options.” Analysts said the news sparked worries of a widespread financial crisis among investors.
Economists have also warned that the banking crisis will make it harder for businesses and consumers to obtain loans as banks tighten their lending requirements, which in turn will result in a productivity decline and a reduced consumption rate in the U.S.