SINGAPORE – On Monday, the dollar surged, reaching a one-month peak against the yen.
This was due to the robust performance of core U.S. retail sales and the impressive earnings of Wall Street banks, which increased market anticipation for a potential interest rate hike by the U.S. Federal Reserve in May.
Although overall U.S. retail sales decreased more than anticipated in March, data released on Friday indicated that core retail sales, which exclude automobiles, gasoline, building materials, and food services, only experienced a slight decline of 0.3% last month.
JPMorgan Chase, Citigroup, and Wells Fargo posted better-than-expected first-quarter 2023 earnings, disregarding the worries of a banking crisis that emerged in March.
The dollar climbed to a one-month high of 134.22 against the yen, while the Japanese currency faced pressure due to the Bank of Japan’s persistent dovish stance.
Simultaneously, the U.S. dollar index stabilized at 101.65, remaining significantly distant from the one-year low of 100.78 recorded on Friday.
The index faced its fifth consecutive weekly loss on Friday, primarily due to indications that inflation in the United States is slowing down. This has resulted in expectations that the Federal Reserve may not need to raise rates as much as previously estimated.
The euro experienced a slight drop to $1.0986, while sterling decreased by 0.02% to $1.2412. According to Tina Teng, a market analyst at CMC Markets, the better-than-anticipated earnings from U.S. banks suggest that the U.S. economy is not as weak as previously thought, which may increase expectations for the Federal Reserve to continue with interest rate hikes.
Money markets are pricing in an 81% chance of a 25 basis points increase in interest rates next month, up from 69% the previous week. Meanwhile, short-term inflation expectations have also risen, with preliminary April readings from the University of Michigan indicating that one-year inflation expectations increased to 4.6% from 3.6% in March.
Yields on U.S. Treasuries remained high on Monday, maintaining most of Friday’s rise. The two-year U.S. Treasury yield, which typically correlates with interest rate expectations, was at 4.1161%, after hitting a two-week high of 4.137% on Friday. The benchmark 10-year yield stood at 3.5166%.
Hawkish comments from Fed Governor Christopher Waller and Atlanta Fed President Raphael Bostic also contributed to the higher interest rate expectations, as they suggested that the Federal Reserve could increase rates by another 25 bps next month.