U.S. Dollar Bolstered by Upbeat Outlook for World’s Largest Economy

Robust data in the United States has pushed yields higher as investors bet that the Federal Reserve will stay the course to raise rates three times this year.
James Hyerczyk
U.S. Dollar Index

The U.S. Dollar put in a stellar performance against a basket of major currencies last week, bolstered by solid U.S. economic data, rising U.S. Treasury yields and a weak performance in the Euro.

Last week, June U.S. Dollar Index futures hit a five-month high and finished the week with five consecutive higher closes, finishing at 93.544, up 1.133 or +1.23%.

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Weekly June U.S. Dollar Index

Key U.S. Economic Reports

Last Tuesday, a government report showed that U.S. retail sales rose at a solid pace in April, a sign that consumers may be rebounding from weak spending earlier this year and driving stronger economic growth.

Retail sales increased at a 0.3 percent rate in April, the Commerce Department said Tuesday, down from a 0.8 percent gain in March, which was revised higher from 0.6 percent. The spending gains were spread across most retail categories, with especially big gains at furniture and clothing stores.

Building permits came in as expected at 1.35 million units. However, U.S. homebuilding tumbled in April and permits fell, suggesting the housing market continued to tread water amid shortages of land and skilled labor.

Housing starts dropped 3.7 percent to a seasonally adjusted annual rate of 1.287 million units in April, the Commerce Department said last Wednesday. The decline reversed March’s rise.

Strong performances were posted by the Empire State Manufacturing Index, Industrial Production and the Philly Fed Manufacturing Index. Business Inventories were weak.

On the slightly weak side, Capacity Utilization came in a little below expectations and Weekly Unemployment Claims rose marginally.

U.S. Treasury Yields

The yield on U.S. 10-year Treasury note hit a new multiyear high last week, returning to a level not seen since 2011.

The 10-year yield briefly hit 3.128 percent, its highest level since July 8, 2011 when the note yielded as high as 3.184 percent. The 30-year bond yield also briefly hit a new high; it topped 3.2640 percent overnight, its highest level since October 3, 2014 when the 30-year yielded as high as 3.276 percent.

Robust data in the United States has pushed yields higher as investors bet that the Federal Reserve will stay the course to raise rates three times this year. Rising inflation, which threatens Treasury prices because it erodes the purchasing power of their fixed payments, puts upward pressure on rates.

After the Fed already approved a one-quarter point-hike in March, the market is now pricing in a 95 percent chance of a June increase, and a 72 percent chance for September.

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Weekly EURUSD

Weakening Euro

The spread between the 2-year yield on U.S. and German bonds hit its widest level since March 1989 last week, making the U.S. Dollar a more attractive asset than the Euro. At point, at mid-week, the spread reached 314 points.

The Euro weakened and the dollar strengthened, pushing the U.S. Dollar Index to a multi-month high as investors fretted about political uncertainty in Italy. There are also concerns European growth momentum has slowed and may impair the ECB’s (European Central Bank) willingness to reduce quantitative easing later this year.

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