US dollar recovers some of this week’s losses

The dollar index on Friday rose by +0.58% and recovered mildly from Wednesday’s 5-week low. Still, the dollar closed -0.9% lower on the week. The dollar on Friday saw support from the stronger-than-expected US consumer sentiment report.

However, there was carry-over bearish sentiment for the dollar based on the favorable CPI and PPI reports seen mid-week, which put Fed policy in a more dovish light. The University of Michigan reported that its preliminary-Aug US consumer sentiment index rose by +3.6 points to a 3-month high of 55.1, which was stronger than market expectations of +1.0 point to 52.5.

The uptick in consumer sentiment was a step in the right direction, but the index is still only 5.1 points above June’s record low of 50.0 (data since 1978). Consumers remain worried about inflation, high gasoline prices, rising interest rates, and a weakening labour market if the economy continues to slide.

In a bearish factor for the dollar, this week’s favorable CPI and PPI reports caused the markets to scale back expectations for a +75 bp rate hike at the Sep 20-21 FOMC meeting to about 50-50 versus the previous view of a very strong chance.