Dollar soars on rate hike outlook

The dollar recovery continues to accelerate on Tuesday, May 26th, as the greenback continued to gain strength from rising anticipations of a rate hike this year. A robust inflation report on Friday helped add to the dollar’s upswing, where underlying core inflation figures for April rose to their highest in more than two years.

Against the yen, the dollar hit an eight-year high around 122.76 and the dollar index continues to trade close to a one-month high.

Versus the euro, the greenback broke below the $1.09 handle for the first time in a month and raised expectations of a move to the 12-year highs below the $1.05 level it hit in March.

Rising inflation figures added to expectations of an interest rate increase from the US Federal Reserve coming later in the year. However, while some recent data from the US has improved the outlook for the nation’s economy after the first quarter’s dismal performance, many analysts remain doubtful that coming data will maintain strength. 

Despite this, woes in Europe weigh on the region’s single currency and add to the dollar’s demand. 

Over the weekend, it emerged that Spain’s governing Popular Party saw major losses in exit polls, which has increased the likelihood of Spain’s anti-austerity Podemos movement forming a coalition with another party. 

Analysts likened the developments to that of debt-stricken Greece, which has shaken up markets and deepened the decline of the euro. The Greek ongoing debt crisis remains in the headlines, adding to the tensions in European markets.

On Tuesday, Greek prime minister Alexis Tsipras threatened to default on the €1.6 billion payment it owes the IMF. He announced that his government was prepared to accept a sustainable deal, “but not a humiliating agreement”.

“Whether Greek prime minister Tsipras can negotiate a deal that is acceptable to enough MPs of his party isn’t clear and markets are once again, very edgy,” noted Kit Juckes, chief currency strategist at French bank Société Générale.