- The dollar closed Friday lower after rallying during the week as traders pushed back expectations for rate cuts.
- The yen fell against the dollar as Treasury yields rose.
- Expectations for inflation in the US rose slightly, from 2.9% in January to 3.0% in February.
Currency futures rose on Friday, despite a higher-than-expected reading in the US PPI report. Meanwhile, the dollar closed lower on Friday after rallying during the week as traders pushed back expectations for rate cuts.
US wholesale prices (Source: Bureau of Labor Statistics)
The Producer Price Index was the second report of the week, showing much higher than expected inflation in the US. However, the dollar did not rise by much, as investors had likely already priced in the move.
Consequently, currency futures like the euro rose on Friday. Moreover, the euro ended higher as markets pushed back expectations for rate cuts in the Eurozone. Notably, ECB president Christine Lagarde said on Thursday that the central bank should hold off on cutting rates to avoid prolonging inflation.
Meanwhile, the yen fell against the dollar as Treasury yields rose. Although the dollar had little reaction to the PPI report, Treasury yields rose as investors continued pushing back rate-cut bets. The yen is quite sensitive to US yields. Therefore, the rise in yields weighed on the currency. Moreover, the yen has lost nearly 6.5% of its value since the year began.
Notably, after the PPI report, expectations for rate cuts fell further, with the likelihood of a March cut dropping to 10.5%. Meanwhile, the chances of a cut in May fell to 33.7%, and those for June fell to 69.9%. In the previous session, investors had placed a 90% chance on a June cut.
Elsewhere, the pound ended Friday nearly flat after recovering on an upbeat UK retail sales report. However, this had little impact on the outlook for the BoE’s monetary policy. Markets still believe the BoE will be among the last major central banks to start cutting rates. This has given support to the pound in recent months.
The US also released a report on consumer sentiment that barely changed in February. Expectations for inflation in the US rose slightly, from 2.9% in January to 3.0% in February.
Although the dollar pulled back on Friday, most fundamentals support a stronger dollar. Data on the labor market, inflation, and economic growth have all come in higher than expected. Therefore, there is a chance the dollar rally will continue.
