U.S. Dollar Index Up Sharply; Boosted by Steep Euro, Yen Sell-off

A steep drop by the Euro and Japanese Yen helped drive June US Dollar Index futures higher last week for the second straight week. Also helping to boost the Greenback was an unexpected drop in the number of Americans filing for unemployment benefits, which hit its lowest level since 1973. This news suggests that the labor market is continuing to gain momentum despite weak economic growth.

Initial claims for state unemployment benefits declined 6,000 to a seasonally adjusted 247,000 for the week ended April 16, the Labor Department said on April 21. Economists had forecast claims rising to 263,000 in the latest week.

The USD/JPY rose to its highest level in three weeks after a report said the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further.

The Dollar/Yen settled at 111.673, up 2.951 or +2.71%. This was the biggest weekly gain for the Forex pair since late October 2014.

The BoJ could consider the new step if policymakers decide to lower the negative 0.1 percent interest rate applied to some bank reserves parked with the central bank, according to Bloomberg.

After reaching its highest level in 10-months at .7834 early in the week, the AUD/USD sold off in dramatic fashion to settle at.7705, down .0013 or -0.17%. The price reversal mirrored those in risk assets more broadly, something that corresponded with the conclusion of the ECB monetary policy meeting media conference. At the time of the Aussie’s weekly high, crude oil and stocks were also experiencing declines.

Sellers also hit the Aussie on Friday after a report said the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further.

The NZD/USD drove to a 10-month high to .7054 early last week, but buyers couldn’t sustain the move amid selling pressure caused by traders pricing in the chance that the Reserve Bank may cut interest rates at its meeting this week in an attempt to bolster lackluster inflation and weaken the currency.

Traders are pricing in a 46 percent chance that the Reserve Bank Governor Graeme Wheeler will cut the official cash rate to 2 percent at the April 28 review while the odds of the OCR being unchanged are 54 percent, based on the overnight interest swap curve.

Further cuts are also being priced in for this year with expectations the RBNZ may lower rates as low as 1.75 percent. If the central bank passes on a rate cut at this time, the odds of a June rate hike are expected to rise substantially.

The USD/CAD fell to its lowest level since the week-ending July 3, 2015 last week, settling at 1.2682, down 0.0131 or -1.02%, driven lower by the rise in crude oil prices.

The Canadian Dollar was also supported by two key economic reports – a much better than expected report on Canadian retail sales for February and a consumer price index report that showed the so called “core” inflation rate increased in March to 2.1 percent, which economists said is still hovering near the Bank of Canada’s target.

The EUR/USD settled at 1.1231, down 0.0050 or -0.44% even though in his April 21 press conference, European Central Bank President Mario Draghi did not suggest an increase in stimulus measures any time soon.

On Friday, traders largely reacted to a worse than expected German purchasing managers’ index survey. This news may be an indication that the European economy is worsening and that negative rates are not working. The weak close for the Euro was its second straight weekly drop against the dollar.

The lower price action also suggests that if Euro Zone data continues to be weak, the central bank could ease further.

Last Thursday, the Euro finished in negative territory after the ECB held its key interest rates unchanged. Earlier that day, the ECB chose to hold interest rates steady, keeping its main refinancing rate unchanged at 0.0 percent; the marginal lending rate unchanged at 0.25 percent and the deposit facility rate unchanged at -0.4 percent.

In the decision, the ECB announced it had started to expand their monthly purchases to 80 billion Euros, and that it is focusing on the implementation of the non-standard measures decided at their last monetary policy meeting on March 10. This could be an indication that quantitative easing is coming.

During the press conference that followed the interest rate announcement, Draghi warned that Euro Zone inflation might turn negative again in coming months. Since the central bank undertook the measures it did in March, the broad financing conditions saw signs of improvement, the ECB said. Draghi also stressed in the conference that the central bank hadn’t talked about helicopter money.

This week investors will get the opportunity to react to interest rate decisions and monetary policy statements from the Reserve Bank of New Zealand and the U.S. Federal Reserve on Wednesday and the Bank of Japan on Friday.