US dollar slips as investors price in end of rate-hike cycle

United States one dollar bills are seen on a light table at the Bureau of Engraving and Printing in Washington in this November 14, 2014, file photo. REUTERS/Gary Cameron

By Amanda Cooper and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) – The U.S. dollar slipped against most major currencies on Friday, as investors digested mounting evidence that growth in the world’s largest economy is slowing and priced in a likely pause in tightening by the Federal Reserve at the June meeting after a widely-expected interest rate hike next month.

In the case of the euro, a surprising recovery in the euro zone economy in April underpinned the currency.

The greenback, however, was headed for its first weekly gain in nearly two months on rate increase expectations for May.

Read More: Asian shares, dollar wobble on caution before central bank meetings

“Expected growth differentials have narrowed slightly against the dollar in the last few hours, with better-than-expected purchasing manager indices pointing to more resilient economic activity in the UK and euro area,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.

“We’re also seeing a continued decline in implied volatility across most asset classes as investors position for an imminent end to the global monetary tightening cycle – and that is weakening demand for traditional safe havens,” he added.

The dollar index, which measures the performance of the U.S. currency against six others, slipped 0.1% on the day to 101.70 and headed for a weekly gain of about 0.2%, its first since late February.

Elsewhere, the recovery in the euro zone unexpectedly gathered pace this month, thanks to a boom in services sector demand compensating for a deepening decline in manufacturing.

Read More: Oil prices at a three-week low as a strong dollar, rate hikes weigh

Preliminary surveys showed that same dynamic in Germany and France, the region’s two largest economies.

The euro was last up 0.1% against the dollar at $1.095, but recovered from a session low of $1.0938. Against sterling, it rose 0.4% to 88.46 pence.

But the story this week has been focused on the dollar as investors braced for the end of the Fed’s tightening cycle. Fed officials have been at pains to point out that inflation remains uncomfortably high and rates must keep rising.

Money markets show traders believe there will be a quarter-point U.S. rate hike next month, which in theory is supportive of the dollar, followed by a pause in June. The rate futures market has also priced in rate cuts this year as the economy slows.

“Although economic activity is cooling, rate differentials are still dollar-supportive, and the U.S. remains the cleanest dirty shirt on the global economic landscape,” Corpay’s Schamotta said.

Read More: The dollar drops as inflation comes in below analyst’s expectations

In other currencies, sterling fell 0.2% to $1.2412, having dropped by as much as 0.54% earlier on.

The yen was one of the stronger performers after data showed Japanese consumer inflation held steady above the central bank’s target in March, putting pressure on the Bank of Japan (BOJ) to ditch its ultra-loose monetary policy stance.

Incoming Governor Kazuo Ueda chairs his first BOJ policy meeting next week.

The dollar fell 0.5% against the Japanese unit to 133.605 yen.


Currency bid prices at 9:41AM (1341 GMT)

       Description      RIC         Last           U.S. Close  Pct Change     YTD Pct       High Bid    Low Bid          

                                                   Previous                   Change                              


       Dollar index                 101.6600       101.7800    -0.11%         -1.768%       +102.0700   +101.6400          

       Euro/Dollar                  $1.0992        $1.0972     +0.18%         +2.58%        +$1.0993    +$1.0938          

       Dollar/Yen                   133.5550       134.2400    -0.51%         +1.87%        +134.2800   +133.5500          

       Euro/Yen                     146.80         147.27      -0.32%         +4.63%        +147.3000   +146.4100          

       Dollar/Swiss                 0.8909         0.8925      -0.17%         -3.64%        +0.8953     +0.8909          

       Sterling/Dollar              $1.2415        $1.2444     -0.23%         +2.66%        +$1.2446    +$1.2377          

       Dollar/Canadian              1.3533         1.3479      +0.41%         -0.11%        +1.3542     +1.3467          

       Aussie/Dollar                $0.6706        $0.6743     -0.53%         -1.61%        +$0.6745    +$0.6678          

       Euro/Swiss                   0.9790         0.9789      +0.01%         -1.05%        +0.9803     +0.9787          

       Euro/Sterling                0.8851         0.8814      +0.42%         +0.08%        +0.8861     +0.8813          

       NZ                           $0.6155        $0.6178     -0.37%         -3.06%        +$0.6180    +$0.6127          


       Dollar/Norway                10.5780        10.6000     -0.08%         +7.93%        +10.6790    +10.5810          

       Euro/Norway                  11.6242        11.6099     +0.12%         +10.77%       +11.6940    +11.5896          

       Dollar/Sweden                10.3088        10.3054     +0.24%         -0.95%        +10.3581    +10.2986          

       Euro/Sweden                  11.3280        11.3010     +0.24%         +1.60%        +11.3407    +11.2990          

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