The U.S. dollar gained broadly in the Asian trading session on Friday local time after new economic data reinforced expectations for another rate hike at the Federal Reserve’s policy meeting next week.
The DXY index, which tracks the dollar’s performance against other six major currencies, rose by 0.59 percent to a one-week high of 102.02. The index previously hit a two-week low on Wednesday, falling by 0.354 percent after new U.S. manufacturing data signaled reduced productivity among domestic producers.
Despite rebounding in the Asian market, the U.S. dollar remained on track to post a monthly loss of over one percent.
Data published on Thursday showed that consumer spending accelerated more than expected in the last quarter, fueled by an eight percent wage growth in households after adjusting for inflation. Analysts at global financial services firm Societe Generale said that the data had fueled expectations that the Fed would raise the interest rate further.
“The Fed is widely expected to hike again next week but with inflation remaining sticky, we expect the Fed to stay on hold for the remainder of the year, dashing hopes of a policy pivot in (the second half),” Societe Generale analysts wrote.
Despite the growth in consumer spending, analysts pointed out that the U.S. gross domestic product (GDP) grew lower than expected in the first three months of the year at 1.1 percent, against the initial forecast of two percent. The U.S. GDP grew by 2.6 percent in the previous quarter.
Economists have said the U.S. will enter a recession sooner than anticipated, given signs from recent economic data. Manufacturing activities declined recently, with producer spending on core products falling in March, and the manufacturing index was negative for the fourth consecutive month in April.
The lack of credit availability as a result of recent banking stresses will further slow the U.S. economy, analysts warn. U.S. banks will likely tighten their loan requirements to protect their liquidity, increasing the difficulty of obtaining loans for households and businesses.
Yen, euro tumble against dollar
In the forex market, the Japanese yen was down 1.55 percent against the dollar to 136.11, its lowest level since mid-March. Sterling also rose to a six-month high against the yen during the trading session at 169.47.
Analysts said the Bank of Japan’s (BoJ) decision to maintain its ultra-low interest rate even if other central banks have continued to raise their rates influenced the yen’s movement. BoJ officials also unanimously decided not to change the country’s yield curve control (YCC) policy.
The euro also tumbled 0.4 percent against the greenback to $1.0986 but remained on track to post a 1.3 percent monthly gain over the U.S. currency. Against the yen, the eurozone currency rose to its highest rate in nearly a decade at 149.50.
According to preliminary data, GDP in the eurozone grew by 0.1 percent in Q1, lower than earlier estimates of 0.2 percent. Data showed that the two largest economies in the region, Germany and France, showed abysmal growth as declining domestic consumption offset the surge in their exports.
“A divergence, which doesn’t make the ECB’s task any easier.”
Carsten Brzeski, Global Head of Macro at ING
In the same period, Spain and Italian showed higher-than-anticipated GDP growth. ING global head of macro Carsten Brzeski said the data divergence would not make the European Central Bank’s (ECB) task “any easier.”
After the new economic data was published, the market predicted that the E.U. central bank would raise the region’s benchmark interest rate by 25 basis points in its upcoming meeting. The International Monetary Fund (IMF) recently encouraged the ECB to continue raising rates until mid-2024 to bring down high inflation in the region.