US dollar modestly firmer after strong data, Fed comments

The US Dollar (USD) drifted higher on Thursday as a mixed batch of U.S. data did little to shake views that the economy is still on solid ground, suggesting the Federal Reserve will likely delay the timing of its first rate cut since 2020 to later this year.

Comments from New York Fed President John Williams saying he does not “feel the urgency to cut interest rates,” given the strength of the economy also helped lift the dollar. The New York Fed president is always a voter on the central bank’s policy-setting committee.

A warning by the finance chiefs of the United States, Japan and Korea over the sharp decline in other currencies weighed on the dollar overnight and offered the yen some rare respite. But the impact has since dissipated.

The yen had risen modestly on Wednesday after Japan’s top currency diplomat Masato Kanda said finance leaders of the G7 reaffirmed their stance that excessive currency volatility was undesirable.

But strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. On Thursday, that strength was on display once again.

Manufacturing activity in the U.S. Mid-Atlantic region expanded by the most in two years in April on the strength of new orders and shipments of finished goods, although factory employment continued to fall.

The Philadelphia Fed’s monthly business conditions index rose to 15.5 from 3.2 in March, exceeding the median estimate among economists in a Reuters poll for a reading of 2.3 and overshooting even the most optimistic forecast among 34 economists surveyed.

“You saw the pullback yesterday and now the dollar is firmer. This goes to show that people are buying on dips and so sentiment has not changed,” said Marc Chandler, chief market strategist, at Bannockburn Forex in New York.

“We saw the Philadelphia Fed survey, which came out stronger than expected. So the market is still making an adjustment toward what looks like an re-acceleration of the economy,” he added.
Other economic reports were neutral to weak. U.S. initial jobless claims were unchanged at a seasonally adjusted 212,000 for the week ended April 13, data showed, still higher than the forecast of 215,000. Claims have been bouncing around in a 194,000-225,000 range this year.

In the housing sector, U.S. existing home sales fell in March as higher interest rates and house prices sidelined buyers. Home sales dropped 4.3% last month to a seasonally-adjusted annual rate of 4.19 million units.

In late morning trading, the dollar index , which measures the U.S. currency against six others, was last up 0.1% at 106.07, still within reach of this week’s 5-1/2-month high of 106.51 hit on Tuesday. The index was so far up 4.5% this year.

The Japanese currency slipped against the dollar, pushing the greenback up 0.1% at 154.62 yen, within sight of Tuesday’s 34-year low of 154.79.

Market participants have raised the bar on possible intervention by Japanese authorities to prop up the yen, now pinpointing the 155 level even though they believe Japan could step in at any time.

Still, given the dollar’s broad strength, Wei Liang Chang, a currency and credit strategist at DBS, said their models suggest the risk of intervention may even have shifted to the 156 range, as Japanese authorities consider the yen’s performance against a handful of other currencies that have depreciated.

In other currencies, the euro dipped 0.1% against the dollar to $1.0661 after Wednesday’s gain, pulling away from a five-month low touched on Tuesday. Sterling was last flat at $1.2452.

Markets are pricing about 39 basis of Fed cuts for 2024, compared with an expectation of around six quarter-point easing at the start of the year. Traders see September as the most likely starting point, versus June just a couple of weeks ago, based on the CME FedWatch Tool.

“In our view, it will take a run of lower CPI readings for the FOMC to cut interest rates in September,” said Kristina Clifton, senior economist at Commonwealth Bank of Australia.
In cryptocurrencies, bitcoin rose 4.4% to $63,508 ahead of the widely anticipated halving event in the next few days.