The dollar held firm on Friday but was pinned near 16-week lows against a basket of major currencies as data showing increased U.S. consumer spending emboldened investors’ hopes that the peak in interest rates was in sight.
The dollar index, which measures the currency against six major peers including the yen and euro, rose 0.05% to 104.71, not far off Thursday’s trough of 104.56, the lowest since Aug. 11.
Data on Thursday showed that U.S. consumer spending in October increased at its greatest pace since January and the labour market remained resilient, with the number of Americans filing new claims for unemployment benefits declining last week.
The latest signs of a strong U.S. economy came after Federal Reserve Chair Jerome Powell said on Wednesday that it was time to slow rate hikes, noting that “slowing down at this point is a good way to balance the risks.”
The data “reinforces the market view that the FOMC is edging closer to the end of its monetary tightening cycle” and that has weighed on the U.S. dollar, said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).
Investors are now turning their attention to nonfarm payrolls data on Friday for clues on how rate hikes have affected the labour market.
“In the near term, the currency market will be driven by U.S. payroll reports and given the market is closely monitoring any sign of a FOMC pivot and a weaker report today will weigh on the dollar,” Kong added.
The prospect of the Fed slowing its pace of monetary tightening has rejuvenated investor sentiment and sent the dollar tumbling after four straight 75-basis-point (bps) hikes that fuelled much of the greenback’s ascent this year.
Futures traders are now pricing for the Fed’s benchmark rate to peak just under 5% in May, as compared to a top of over 5% before Powell’s comments on Wednesday.
Meanwhile, the dollar was 0.16% lower at 135.12 yen, having slipped as low as 135.01 yen earlier – the lowest since Aug. 18. The euro slid 0.02% to $1.0524, after gaining 1% overnight.
European Central Bank President Christine Lagarde warned on Friday that some European governments’ fiscal policies could lead to excess demand, and that fiscal and monetary policies need to work in synch for sustainable, balanced economic growth.
Sterling was last trading at $1.22445, down 0.15% on the day. The pound advanced 1.7% overnight and touched a 5-month high of $1.2311.