Dollar Soars to New Highs as Fed Remains Hawkish, Sterling Retreats Further

The U.S. dollar continued its upward trajectory on Friday, reaching new highs as the Federal Reserve’s hawkish stance contrasted with the more dovish policies of its European counterparts. Sterling, meanwhile, continued its decline amid expectations of a Bank of England rate cut in August.

The Dollar Index, measuring the greenback against a basket of major currencies, rose 0.1% to 105.365, approaching its recent one-month peak.

Fed’s Hawkish Stance Bolsters Dollar

The U.S. dollar has remained strong despite recent data indicating a slowing economy. Soft housing and labor market numbers, coupled with expectations of a slowdown in PMI data, have not deterred Fed officials from advocating caution and demanding more data before considering interest rate cuts.

This contrasts with the European Central Bank’s recent rate cut, the Swiss National Bank’s two rate cuts, and the Bank of England’s potential rate reduction in August.

Sterling Weakens as Rate Cut Looms

The British pound fell 0.1% to 1.2652, nearing a five-week low following the Bank of England’s decision to hold rates steady. However, comments from some policymakers suggesting a finely balanced decision raised expectations of a rate cut at the next meeting in August.

Despite the weakening pound, British retail sales data provided some support, showing a sharp rebound in May after a decline in April attributed to heavy rainfall.

Euro Under Pressure Amid Weak Data and Political Concerns

The euro fell 0.1% to 1.0692, extending its recent decline following weak economic data and ongoing political worries in the region. Eurozone business growth slowed significantly, with the services sector showing signs of weakness and manufacturing experiencing a further downturn.

Analysts at ING noted that the euro is under pressure due to dovish signals from the ECB’s counterparts and lingering concerns about EU fiscal and political developments.

Yen Falls to Eight-Week Low

The Japanese yen slipped to an eight-week low against the dollar after the Bank of Japan’s decision to postpone reducing bond-buying stimulus until its July meeting. Additionally, the U.S. Treasury added Japan to its watchlist for potential currency manipulation, citing the BOJ’s interventions to support the yen.

Chinese Yuan Struggles Amid Economic Concerns

The Chinese yuan remained under pressure, weakening past 7.26 per dollar for the first time since November, as doubts persisted about the strength of China’s economic recovery.

Overall, the U.S. dollar’s strength reflects the divergence in monetary policy between the Fed and its European counterparts, while sterling and the euro face challenges from domestic economic and political factors. The yen continues to struggle amid the Bank of Japan’s ongoing stimulus efforts and scrutiny from the U.S. Treasury.