Dollar edges lower, but on track for hefty weekly gains

Investing.com - The U.S. dollar edged lower in early European trade Friday, but was still on course for its largest weekly rise in over a month on fading expectations of early Federal Reserve rate cuts. 

At 04:40 ET (08:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.910, but was on track for a gain of 0.6% this week, its largest one-week rise since mid-April.

Dollar boosted by reduced rate cut expectations

Data released Thursday showed U.S. business activity accelerated to the highest level in just over two years in May, prompting a pullback in U.S. interest rate cut expectations and a rise in government bond yields.

This followed on from the minutes of the Fed’s late-April meeting showing policymakers were growing increasingly concerned over sticky inflation, adding weight to the comments from numerous officials advocating caution over loosening monetary policy.

The CME Fedwatch tool showed traders were pricing a nearly equal probability of a cut and a hold -- around 46% -- in September, after earlier expectations had shown an over 50% chance of a cut. 

The next data release of note is likely to be the personal consumption expenditures price index, the Fed’s preferred gauge of inflation, which is  due on May 31.

This will likely give the next hints about whether the Federal Reserve is in position to start lowering interest rates later this year.

Sterling slips after weak UK retail sales

In Europe, GBP/USD edged lower to 1.2696, after data showing that British retail sales fell by more than expected in April, dropping by 2.3% on a monthly basis, as wet weather kept shoppers away from clothing retailers and sports stores.  

“Markets are pricing in only 33bp of easing by year-end and less than 10bp for the August meeting. We still expect an August cut, and see any views for delayed easing due to the U.K. vote as misplaced,” said analysts at ING, in a note.

EUR/USD traded 0.1% higher to 1.0821, after the German economy grew by 0.2% in the first three months of 2024, the statistics office reported on Friday, confirming preliminary data.

"After GDP declined at the end of 2023, the German economy started 2024 with positive growth," said Ruth Brand, president of the statistics office.

“Given the risk of some hotter eurozone inflation and markets having shown a tendency to look on the brighter side of US price dynamics of late, the coming days may revamp some bullish sentiment on EUR/USD. A return to 1.0900 seems more likely than a drop to 1.0700 in the near term,” said ING.

The European Central Bank is widely expected to start its rate-cutting cycle next month.

Yen climbs near to three-week high

In Asia, USD/JPY gained 0.1% to 157.07, with the pair rising to an over three-week high, extending a rebound from lows hit in the immediate wake of government intervention seen earlier in May.

The yen took little relief from consumer price index data which showed inflation eased as expected in April, as spending remained weak. 

USD/CNY traded 0.1% higher at 7.2448, close to a six-month high, with further weakness in the yuan being limited by a substantially stronger midpoint fix from the People’s Bank of China. 

The stronger fix came as a simmering trade war with the U.S., doubts over more stimulus measures and increased tensions with Taiwan presented a wave of selling pressure for the yuan.