The US dollar gained ground versus the euro on Friday and was on track for its greatest weekly gain since February, as concerns about the US debt ceiling and monetary policy triggered a flight to safe havens. Analysts believe the dollar will gain as debt limit negotiations continue and markets reconsider the narrative that the US Federal Reserve would lower interest rates before the end of the year.
Fed Governor Michelle Bowman stated that if inflation remains strong, the central bank will likely need to hike rates further, adding that crucial evidence so far this month has not convinced her that price pressures are subsiding.
“It certainly does seem like Bowman’s comments this morning have added weight to the idea that the Fed will perhaps maintain that higher-for-longer stance. And that will keep yields relatively well supported,” said Karl Schamotta, chief market strategist of Corpay in Toronto.
On Thursday, the Bank of England raised interest rates by 25 basis points to 4.5%. The British economy increased by 0.1% in the first quarter, according to data released on Friday. Nonetheless, the pound fell 0.2% to $1.2490, while the euro fell 0.4% to $1.0874, a day after hitting a one-month low.
The dollar index rose 0.3% to 102.42 early in the morning, giving it a 1.1% weekly gain. It lost ground after news that May U.S. consumer confidence fell to a six-month low, as a deadlock over raising the federal government’s borrowing limit fueled concerns about the economy.
Recent data indicating a weakening economy has bolstered the case for the Fed to suspend rate hikes at its June meeting, but this hasn’t damaged the dollar. Data showed U.S. consumer price index inflation cooling to 4.9% year-on-year in April. Moreover, weekly jobless claims rose more than expected.
However, analysts said markets had expected even weaker data. And worries about the U.S. debt ceiling and regional banking stress persist. PacWest Bancorp shares plunged 23% a day after the lender revealed a sharp drop in deposits.
“I guess the recent USD strength is largely driven by increased safe-haven demand in view of ‘unknown unknowns,’ i.e. how severe are vulnerabilities in U.S. regional banks and what might be the fallout of an escalation in the U.S. debt ceiling conflict,” said Esther Reichelt, FX strategist at Commerzbank.
Given this huge uncertainty, “the dollar might be the best bet they have,” she added.