US Dollar Falls as Markets Reassess Fed’s Path

On Friday, the US dollar fell, which was the first weekly decline for the currency in a month. This was because traders were pulling back bets on when the Fed would finally hit a pause on hiking interest rates. Investors had pushed forward their outlook regarding the timing of the rate cuts for preventing a possible economic recession.

Equity Markets Rebound

This week saw equity markets rebound and fears of inflation ease up a bit, primarily because prices of commodities and oil were down. This had eroded the demand of safe-haven assets that had been driving up the US dollar against a basket of its peers.

Market strategists said that headline inflation could come down significantly with commodity prices declining, particularly in the autumn months. This would help in reducing the need for aggressive hiking of interest rates.

The probability of the Fed hiking the interest rate by 75 basis points in July now has a 73% possibility. However, the market has factored in a rate hike of 50 basis points for September. On Friday, the fed funds rates was priced in at 3.31%, which had been 3.51% a week earlier. There was a 0.2% drop in the dollar index in afternoon New York trading, which measures the greenback against a basket of six of its peers. It was trading at 104.013.

Data Causes Further Decline

There was a further decline in the US dollar after data showed that there was a 10.7% rise in new home sales last month to 696,000 units, after annual adjustment. The sales pace for May was revised higher and reached 629,000 units, as compared to the previously reported figure of 591,000.

The consumer sentiment survey by the University of Michigan had mixed results, as there was a worsening in consumer sentiment to 50 in June. The reading had been 58 in the previous month. However, the reading for inflation in five years had eased to 3.1% from the 3.3% that had been estimated in mid-June.

Yearly Gain

There has been a 9% gain in the US dollar so far this year, but the safe-haven currency lost some of its shine as investors began to bet that the monetary tightening pace could slow down after another increase of 75 basis points in July. Now, traders have priced in bets of interest rates peaking at 3.5% in March and a decline of 20 basis points in the rate by July 2023.

The repricing in the rate hikes brought the US Treasury yields to a low of two years, while there has been a 0.5% decline recorded in the dollar index for the week. While Fed chairman Jerome Powell said that the central bank had an ‘unconditional’ commitment to dampen inflation, Michelle Bowman, the Governor, said that they were likely going to see 50 basis points increases in the next few meetings after July.

According to analysts, the developed world is seeing terminal rate repricing because fears of an economic recession are climbing steadily.