The US dollar lost a little ground on Friday as high inflation wreaked havoc on consumer sentiment, but the greenback posted its biggest weekly gain in almost three months after a surprisingly strong US inflation print on Wednesday prompted investors to advance their bets for a US rate hike.
The US dollar turned red on Friday morning after a University of Michigan survey showed a plunge in US consumer sentiment early this month to its lowest level in a decade as surging inflation cut into households’ living standards, with few believing policymakers are doing enough to mitigate the issue.
With short-dated US Treasury yields edging higher — five-year bond yields rose to highest since February last year — investors were ramping up bets this week that the US Federal Reserve will have to raise interest rates sooner than expected.
Against a basket of its rivals, the US dollar index on Friday fell 0.06 percent to 95.12 after falling as low as 94.991 in response to consumer sentiment. Earlier in the session it had risen to its highest level since July last year. The index rose 0.8 percent for the week.
In Taipei, the New Taiwan dollar rose against the US dollar, gaining NT$0.004 to close at NT$27.836, up 0.2 percent weekly.
“Consumers are clearly more worried about real income growth as inflation outpaces wages for now, and that is weighing on sentiment,” Wells Fargo macro strategist Erik Nelson said. “That is feeding into growth worries for the dollar and pushing it lower against most currencies, especially the Japanese yen as US yields decline here.”
The US dollar fell 0.14 percent to ￥113.915 after falling as low as ￥113.77.
Currency markets have been shaken up since Wednesday, when data showed a broad-based rise in US consumer prices last month at the fastest annual pace since 1990, casting doubts on the Fed’s stance that price pressure will be transitory.
However, while Friday’s survey raised some eyebrows, strategists were bullish on the US dollar, which was boasting its biggest weekly percentage gain since the week ending Aug. 22.
“The confidence data this morning was probably a bit of an eye-opener for the markets ... and perhaps helped nudge the dollar just slightly off its highs,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto.
While the closure of bond markets on Thursday interrupted the flow of the market this week, still “the focus is clearly on inflation” Osborne said, adding that this “should mean that the US dollar stays relatively well-supported.”
“We’ll be in a standoff in the next few months. We’ll keep an eye on what the Fed does,” he said.
The renewed strength in the US dollar earlier during the week injected fresh life into the moribund currency volatility markets, as traders have scrambled to buy options to protect themselves against further US dollar strength.
A currency volatility index hit a fresh six-month high on Friday. Markets were pricing a first rate increase by July next year and a high likelihood of another by November. CME data is assigning a 50 percent probability of a rate hike by then, compared with less than 30 percent a month earlier.
The euro was down 0.06 percent at US$1.1443 after falling earlier to an almost 16-month low at US$1.1433.
Investors have become increasingly bearish on the outlook for the single currency as the European Central Bank appears unlikely to change its extremely dovish policy settings in the near term against the backdrop of a slowing economy.
Sterling was up 0.39 percent against the US dollar. It had gained ground in late morning as the US dollar weakened and after the EU said it was committed to coming to an agreement with the UK regarding Northern Ireland.
The risk-sensitive Australian dollar was up 0.53 percent at US$0.733 after earlier sinking as low as US$0.7277 for the first time in more than a month.
Bitcoin was down 1 percent at US$64,104.89 after briefly hitting a record high of US$69,000.
Additional reporting by CNA, with staff writer
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