Dollar Edges Higher as U.S. Rate Outlook Offers Continued Support

By Peter Nurse – The U.S. dollar pushed higher in early European trade Friday, heading for its best week in seven months as the market priced in several interest rate hikes by the Federal Reserve this year. 

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged 0.1% higher to 97.345, after breaking through 97 earlier this week for the first time since July 2020.

The greenback has seen strong demand this week after comments from Fed Chairman Jerome Powell pointed to more interest hikes this year than the three that had previously been factored in, likely starting in March.

Data showing U.S. GDP growing a better-than-expected 6.9% quarter-on-quarter in the fourth quarter of 2021, as well as the best annual growth in nearly four decades, raised expectations that the first interest rate increase could be as much as 50 basis points instead of the traditional 25 bps. 

These gains have continued in European hours Friday but in a limited manner after data showed France’s economy, the second largest in the euro area,  continued to grow at the end of last year, with gross domestic product climbing 0.7% in the fourth quarter thanks to strong domestic demand. Spanish GDP also grew more than expected, by 2.0% on the quarter and 5.2% year-on-year.

EUR/USD still fell 0.1% to 1.1131, around a 20-month low, with German GDP, due later Friday, expected to show a fall of 0.3% on the quarter in the fourth quarter. The German economy, usually the region’s powerhouse, could be heading toward its second recession of the pandemic.

USD/JPY rose 0.3% to 115.64, with a Reuters poll suggesting Japan’s factory output likely slid in December for the first time in three months due to lingering supply bottlenecks.

GBP/USD rose 0.1% to 1.3394 ahead of the Bank of England’s meeting next week, with rates markets pricing a 90% chance of a hike following an unexpected surge of inflation in December, while the risk-sensitive AUD/USD dropped 0.2% to 0.7020, hard hit this week.

USD/CNY fell 0.1% to 6.3653 with the yuan rebounding a touch after the Chinese currency suffered its worst session in seven months on Thursday as weakening industrial profit growth in China bolstered the case for monetary easing, just as the Federal Reserve looks to hike.

Attention will turn  later in the session to the release of sentiment surveys in the United States as well as more inflation data in the form of the monthly PCE Price Index and the employment cost index, which will be scanned for signs of emerging wage inflation.