Dollar Weakness Indicates Traders Believe Fed Will Limit Future Rate Hikes

The spotlight was on the U.S. Dollar again last week and the greenback did not disappoint, falling to a 7-month low against a basket of currencies. For the second week in a row, the New Zealand Dollar was the big winner.

June U.S. Dollar Index futures settled the week at 96.670, down 0.694 or -0.71%.

The U.S. Dollar was unpinned early in the week, driven by short-covering and position-squaring as investors reacted to oversold technical conditions and to expectations for a solid jobs report later in the week. Also helping to give the dollar a firm tone was a pair of economic reports. U.S. consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand early in the second quarter.

The Core PCE Price index rose 0.2% on a monthly basis. This was better than the forecast and previous read, but some investors were disappointed because on an annual basis, inflation is still running below the Fed’s 2.0% target.

Personal Spending was up 0.4%, matching expectations and the Conference Board’s Consumer Confidence report came in at 117.9, below the 120.1 estimate.

Most of the selling pressure on the dollar occurred on Friday. It plunged 0.58% lower after the release of a disappointing U.S. Non-Farm Payrolls report

The Non-Farm Employment Change showed the economy added 138K jobs in May, coming in well-below the 181K estimate. Average Hourly Earnings matched the estimate of 0.2% and the Unemployment Rate inched lower to 4.3% from 4.4%.

The jobs report was not weak enough to curtail the Federal Reserve’s plan to raise interest rates on June 14, but it likely means the central bank will limit the number of future rate hikes.

Japanese Yen

The jobs data was weak enough to put pressure on U.S. Treasury yields. This helped make the U.S. Dollar a less attractive investment, boosting demand for the Japanese Yen. The USD/JPY closed the week at 110.421, down 0.888 or -0.80%.

Australian Dollar

The weaker U.S. Dollar also helped boost the Australian Dollar on Friday, helping the currency recover most of its earlier-in-the-week losses.

The AUD/USD finished the week at .7440, down 0.0003 or -0.04%.

Australian Retail Sales came in 1.0% higher, beating the 0.3% estimate. However, gains from this news were short-lived because of disappointing Private Capital Expenditure data. This quarterly report showed Capex was 0.3% higher versus a 0.4% estimate. The AUD/USD was also pressured by weak manufacturing data from China. The Caixin Manufacturing PMI came in at 49.6, lower than the 50.2 estimate.

New Zealand Dollar

The New Zealand Dollar rose sharply against the U.S. Dollar for a second week. The NZD/USD ended the week at .7143, up 0.0082 or +1.16%.

The Kiwi was supported by the plunge in the Greenback due to the disappointing jobs report, but also by an upbeat Reserve Bank of New Zealand Financial Stability Report.

The report showed that New Zealand’s financial system remains sound and is operating effectively. The NZD/USD also got a boost from positive comments from RBNZ Governor Graeme Wheeler. He said that risks to the domestic financial system had receded.

In the central bank’s semi-annual Financial Stability Report, Wheeler said that the country’s financial system “remained sound”, but that “global uncertainty remains elevated.”

In other domestic news, New Zealand’s terms of trade reached its highest level in 40 years in the first quarter of 2017 as a recovery in the dairy sector helped to strengthen the country’s purchasing power abroad, the National Statistics Bureau said on Thursday.

The country’s terms of trade jumped 5.1 percent to the highest level since June 1973, Statistics New Zealand said, but it was below the growth in the last quarter of 2016 when it rose 5.7 percent, its strongest rate in more than three years.