Dollar Gives Up Weekly Gains after U.S. Reports Soft Consumer Inflation Data

The U.S. Dollar posted a two-sided trade last week before settling nearly flat. Bullish investors drove the Greenback to a multi-month high after 10-year Treasury yields took out the psychological 3 percent level for a second time in a month. However, the rally stopped and the dollar retreated against a basket of currencies after the U.S. government reported weaker-than-expected consumer inflation data.

June U.S. Dollar Index futures settled at 92.411, up 0.003 or +0.00%.

Additionally, a surge in crude oil prices after President Trump announced the U.S. withdrawal from the Iran nuclear accord, drove up demand for commodity-linked assets, further weakening the U.S. Dollar.

The dollar rallied against a basket of currencies early last week as investors continued to bet on additional rate hikes by the U.S. Federal Reserve and as they bet against an early withdraw of stimulus by the European Central Bank.

Essentially, the divergence in monetary policy trends between the U.S. and other major central banks is driving up demand for the U.S. Dollar.

June U.S. Dollar Index futures topped on Wednesday after a surge in crude oil prices drove investors into commodity-linked currencies and safe haven asset buying encouraged investors to book profits. The index weakened further after the Labor Department said on Thursday its Consumer Price Index rebounded less than expected in April.

U.S. consumer inflation rose 0.2 percent versus an estimate of 0.3%. Core CPI rose 0.1 percent, lower than the 0.2% estimate. The Dollar retreated because the report suggests the Fed will be less-aggressive with its plan to raise interest rates later this year. Currently, the market is pricing in 2 or 3 more rate hikes in 2018.

Japanese Yen

Despite the weaker-than-expected U.S. consumer inflation data, the Dollar/Yen was able to hold on to its gains. They were primarily driven by the widening interest rate differential between U.S. Government Bonds and Japanese Government Bonds.

The USD/JPY settled at 109.352, up 0.317 or +0.29%.

In other news, Bank of Japan board members discussed the need for policy sustainability and strengthened commitment to reaching its 2 percent inflation goal during its April 26-27 policy meeting, when it removed language about when it expected to hit that target.

A summary of opinions from that meeting, indicate that the BOJ looks to continue on its current course.

New Zealand Dollar

The New Zealand Dollar finished lower last week, but was able to claw back some of its losses late in the week.

The NZD/USD settled at .6963, down 0.0056 or -0.79%.

Last week, the Reserve Bank of New Zealand (RBNZ) left interest rates unchanged at 1.75% for a 19^th consecutive month. Additionally, based off the latest forecasts and monetary policy statement released by new RBNZ Governor Adrian Orr, the central bank indicated it is no rush to lift it official rate.

“Economic growth and employment in New Zealand remain robust, near their sustainable levels. However, consumer price inflation remains below the 3% midpoint of our target due, in part, to recent low food and import price inflation, and subdued wage pressures.” Orr said, adding that he sees “consumer price inflation gradually rise to our 2% annual.”

Australian Dollar

Increased demand for the commodity-linked Australian Dollar as well as technically oversold conditions helped the Australian Dollar rebound enough from a multi-month low to close higher for the week.

The AUD/USD settled at .7540, up 0.0003 or +0.03%.

Additional support was provided by a drop in U.S. Treasury yields, which fell due to the softer U.S. inflation data.

A surge in crude oil prices to levels not seen in 3 ½ years helped give commodities a boost last week. This also helped drive up demand for the commodity-linked Australian Dollar.

Early in the week, Australian Retail Sales came in at 0.0%, down from the previously reported 0.6%. It also missed the 0.2% estimate.

Additionally, Australia’s center-right government said in its annual budget on Tuesday that it would return the country’s finances to a small surplus in 2019/20, a year earlier than planned and after almost a decade of deficits.

The improved budgetary position was welcomed by two biggest ratings agencies – Standard & Poor’s Global and Moody’s Investors Service.