Dollar has strongest week since 2022 as investors reverse bets on rate cuts

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The dollar delivered its strongest weekly performance since 2022 after higher-than-expected US inflation figures sent ripples through global markets.

The U.S. currency has strengthened 1.7% against a basket of six currencies since Monday, its best weekly performance since September 2022, as traders reversed bets on anticipated interest rate cuts by the Federal Reserve.

The euro and pound sterling fell to their lowest levels against the dollar since November on Friday, at $1.0642 and $1.245, respectively, while the yen fell to a 34-year low, before recovering at ¥153.28.

The fall in sterling also contributed to a 0.9 percent rise in British stocks on Friday, as the FTSE 100 index, whose constituent companies derive most of their revenue in dollars, ended the day just ahead a record close.

“The US is a special case, with very accommodative fiscal policy and now tighter monetary policy, which is a recipe for a stronger dollar,” said Quentin Fitzsimmons, senior portfolio manager at T Rowe Price . “The buzzword currently circulating in the markets is “divergence”.

This week’s rise in U.S. consumer price inflation – which rose to a higher-than-expected 3.5 percent rate for March – prompted traders to bet more on the Fed could cut interest rates this year.

That compares with expectations of cuts of up to six quarter points in early January.

On Thursday, the European Central Bank indicated it was still on track to cut interest rates in June. Pressure on the euro has increased due to growing expectations that interest rates in the euro zone will fall sooner than those in the United States.

As of Friday afternoon, the single currency was down 1.8 percent for the week, the biggest weekly decline since September 2022.

“It appears that a happily divergent ECB has weakened the euro against the dollar,” said Chris Turner, head of global markets at ING.

This change in sentiment helped push the spread – or gap – between the US and German governments’ benchmark 10-year borrowing costs to 2.17 percentage points, its highest level since 2019.

Speculation also grew that Sweden’s Riksbank could cut interest rates as soon as May after the country reported weaker-than-expected inflation on Friday.

Fears of an imminent Iranian attack on Israel, in response to an airstrike on the Islamic Republic’s consulate in Syria, may also have contributed to the recent rise in the dollar, analysts say.

“Increasing tensions between Iran and Israel could result in an even higher rise in oil prices, all to the benefit of the dollar in the short term,” said Francesco Pesole, a currency analyst at ING.

The dollar is seen as a safe haven for investors during times of heightened geopolitical uncertainty.

The dollar’s continued strength could pose problems for countries seeking to cut rates without weakening their currencies or accelerating price increases.

The outlook was complicated by soaring oil prices, with Brent crude surpassing $92 a barrel for the first time since October on Friday, amid growing fears of wider conflict in the Middle East.

“Other central banks clearly do not want their currencies to weaken significantly. . . that means that in reality you will end up importing more inflation,” said James Novotny, portfolio manager at Jupiter Asset Management.

Markets are betting that the ECB will make cuts of at least three-quarters of a point by the end of the year, compared to two cuts for the Bank of England and only one or two for the Fed.

The Japanese currency suffered the most from rising US rate expectations, which pushed the yen to its lowest level since 1990, putting the Finance Ministry on red alert for possible intervention.

Masato Kanda, Japan’s deputy minister of finance and international affairs, told reporters on Thursday that authorities would not rule out any measures to address excessive exchange rate fluctuations.

Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said the impact of any intervention would be costly and temporary.

“The yen has been undermined by (Bank of Japan) policy, which is too accommodative,” he said. “It appears the yen remains vulnerable simply because the political gap remains extremely wide.”