Dollar strengthens as market waits for new economic data

The U.S. dollar strengthened in the forex market on Monday as investors waited for new economic data to determine whether the Federal Reserve would prolong its monetary tightening campaign.

The dollar index, a tracker of the currency's rate versus major peers, rose by 0.15 percent to 103.17. The index hit a two-month high of 103.63 last week. The greenback gained 0.46 over the Japanese yen to 138.55, hovering below the six-month high of 138.75 it hit last Thursday.

Against the dollar, the euro added 0.12 percent to trade at $1.0819 after hitting $1.0760, the lowest in nearly two months, last Friday. Sterling declined by 0.03 percent to $1.2442 after posting a three-week low of $1.2392 on Thursday.

The Australian dollar was steady at $0.6652, while the New Zealand dollar gained 0.18 percent to trade at $0.6288. Investors expect the Reserve Bank of New Zealand to hike the country's cash rate by 50 basis points on Wednesday.

The Chinese yuan rose to 7.0465 per dollar in offshore forex trading, previously breaching a six-month low of 7.0750 on Friday. China's uneven post-pandemic economic recovery put pressure on its currency, according to analysts. The Chinese currency, however, improved after the People's Bank of China announced a plan to control exchange rate fluctuations.

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Investors are currently waiting for the personal consumption expenditures data due to be released later this week to predict the Fed's policy direction. Analysts said a stronger-than-expected economic report fueled the greenback's rally in recent weeks, along with hawkish remarks from several voting members of the U.S. central bank.

"The dollar had a nice two-week bounce, helped by rising U.S. interest rates."

Marc Chandler, Bannockburn Global Forex chief market strategist

The Commerce Department reported last week that retail sales in the U.S. increased by 0.4 percent in April, the first increase since January. Based on the data, online shopping and dining out were the largest contributors to the gain.

The data also showed that car purchases increased for the month despite rising prices. This stronger-than-expected data indicates that the Fed's interest rate hike campaign works slowly to bring inflation back to the target rate of two percent, said analysts.

The Fed also reported Monday that inflation had reduced a sense of financial security in U.S. households, with many people saying they used their savings to fulfill their daily needs, delayed purchases or switch to cheaper products and felt less secure about retirement.

St. Louis Fed President James Bullard said the central bank might still need to raise the interest rate by another half of a point percentage in 2023. Neel Kashkari, president of the Minneapolis Fed, said it was a "close call" whether he would vote for a rate hike or a pause.

Atlanta Fed President Raphael Bostic said he would wait "a little bit" before deciding on the next action, while Richmond Fed President Thomas Barkin said he needed more supportive data indicating a steady decline in inflation.

Last Friday, Fed Chairman Jerome Powell addressed the tighter credit situation in the country, saying that this condition could mean fewer rate hikes by the Fed. Chandler said it was "the strongest case yet for a pause."

Debt ceiling crisis remains unresolved

The unresolved debt ceiling crisis in the U.S. also helps fuel the dollar's recent rally, according to analysts. Analysts said the currency's status as a stable store of value increased its attractiveness among traders amid the uncertainty.

President Joe Biden and House Speaker Kevin McCarthy's meeting on Monday did not end in a final agreement regarding raising the debt limit. Republican Patrick McHenry, who was present at the meeting, however, said the tone of the meeting was "the most positive" yet.

Experts predicted that lawmakers would come to an agreement in time before the U.S. defaults on its payments. Treasury Secretary Janet Yellen said the country could default on its debt by next month.