US Dollar Falls but Stays Close to 4-1/2 Month Highs

The dollar declined against its major peers on Thursday, but still stayed close to its 4-1/2 month highs, as interest rate differentials continued to support the currency.

The US dollar index last stood at $92.78, falling 0.1 percent, hovering just below Wednesday’s 4-1/2 month gain of $93.26.

The greenback edged lower by 0.05 percent to 109.65 against the yen and was also in close proximity of the 3-month high of 110.03 achieved on May 2.

The dollar dropped 0.5 percent to 1.2776 against its Canadian counterpart, while it shed 0.2 percent to 1.0027 against the Swiss franc.

Market economist Ayako Sera said increases in interest rates are supporting the greenback, noting that investor sentiment is stronger now than in February, when concerns about higher rates pressured stock prices.

She added that currently, inflation is higher and there is no significant risk-off factors, with even the 

US departure from the Iran nuclear accord having a slight impact, and in that type of environment, interest rate differentials could end up being the main driver for the dollar.

Meanwhile, the euro added 0.2 percent to 1.1877 against the greenback, recovering from a 4-month low of 1.1821 in the previous session.

The British pound slipped 0.2 percent to 1.3516 against the dollar, after hitting a 4-month decline of 1.3483 on Tuesday. The Bank of England (BOE) is expected to keep its interest rates untouched at its policy meeting later in the day.  

Recent series of weak economic figures and renewed concerns over Brexit have driven investors to lower expectations for a rate hike.

Fed Rate Hike Expectations

Expectations of higher interest rates by the Federal Reserve this year contributed to the greenback’s gains, since such prospect makes the US currency more appealing to investors seeking yield.

Investors are now anticipating the release of the consumer price index (CPI) data later in the day, which may show acceleration in inflation, giving Fed a reason to hike rates in a much quicker manner than currently expected.      

Annual core CPI inflation is estimated to grow from March’s 2.1 percent to a record of 2.2 percent in April, its highest in more than a year.  

Producer Price Index (PPI) presented on Wednesday was up by 0.2 percent in the prior month, following a raise of 0.3 percent in March, meeting market forecast.

Rising US Bond Yields

The dollar has also maintained strength on rising yields, which have been driven by President Donald Trump’s statement on Tuesday about the US leaving the Iran nuclear agreement.

The announcement has put oil supply at risk, as the Trump administration intends to reinstitute sanctions on Iran.

Treasury yields increased in the wake of higher oil prices, with the 10-year US Treasury notes moving above the key 3 percent level for the first time since late last month.

The 10-year yield lost 0.7 percent to 2.971 on Thursday, after going beyond 3 percent range on Wednesday, though it remained near its peak of 3.035 reached in 2018.  

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