Dollar edges higher; solid bank results lift Fed hike expectations

Dollar edges higher; solid bank results lift Fed hike expectations
© Reuters

By Peter Nurse – The U.S. dollar edged higher in early European trade Monday, bouncing off last week’s one-year low after strong earnings from some of Wall Street’s banking giants diluted concerns about the sector, raising expectations of another interest rate hike by the Federal Reserve.

At 01:55 ET (05:55 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.360.

The index posted its fifth straight weekly loss on Friday, when it fell to a new one-year low of 100.78 in the wake of the U.S. recording the biggest drop since the start of the pandemic.

With inflation cooling quickly and the Fed policy makers expressing concerns that weakness in the banking sector could result in a “mild recession” this year, traders had begun to factor in a pause in the central bank’s rate-hiking cycle in May.

However, Friday saw the release of a strong set of first-quarter 2023 earnings from JPMorgan Chase (NYSE:), Citigroup (NYSE:), and Wells Fargo (NYSE:), lifting concerns about the banking crisis that unfolded last month.

Additionally, Federal Reserve Governor called for more monetary policy tightening to reduce persistently high inflation.

“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday.

In the next few days, investors will have a final chance to hear from more Fed officials before they enter their traditional blackout period ahead of the meeting, including New York Fed President , Governor , and Governor .

Most investors now expect will hike rates another 25 basis points at its next policy meeting on May 3.

fell 0.1% to 1.0991, retreating from the one-year high seen last week, but the single currency remains in demand given the widely-held expectations that the will continue hiking interest rates for longer than its U.S. counterpart amid fears rapid price growth is at risk of becoming entrenched.

“I do not think that our job is already – or even mostly – done,” ECB Governing Council member Joachim Nagel said on Friday. “Rather, in my opinion, further interest rate hikes will be required.”

The ECB has raised rates by at least 50 basis points at each of its past six meetings, and is expected to do something similar in May.

rose 0.1% to 1.2419, with the U.K. set to release February on Tuesday, followed by March a day later, which could determine whether officials decide to hike interest rates by another 25 basis points at their meeting next month.

Elsewhere, edged higher to 0.6711, ahead of Tuesday’s release of the of the Reserve Bank’s April meeting, while rose 0.2% to 133.99.

traded flat at 6.8718, ahead of a key reading on first-quarter due on Tuesday.

U.S. dollar slumps after weak data; markets betting Fed near end of hiking cycle

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