U.S. Dollar Rises Amid Increased June Rate Hike Speculation

The big winner in the foreign currency markets last week was the U.S. Dollar. It began to pick up strength early in the week with the release of better-than-expected consumer price data. This fueled talk of a sooner-than-later interest rate hike. Speculators pounced on the news, driving foreign currency and commodity market sharply lower. U.S. equity indices also declined before recovering at week’s end.

U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year.

The Labor Department said on Tuesday its Consumer Price Index increased 0.4 percent last month, the largest gain since February 2013, after rising 0.1 percent in March. That took the year-on-year increase in the CPI to 1.1 percent from 0.9 percent in March.

Improvements in the U.S. housing industry also signaled an improving economy. U.S. housing starts rose more than expected in April as builders ramped up the construction of single and multifamily homes, supporting views that the economy was regaining steam early in the second quarter.

The dollar was further supported by the Fed minutes from its April meeting. The minutes suggested the Federal Reserve will likely raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment.

Members of the Fed’s policy-setting committee said recent economic data made them more confident inflation was rising toward their 2 percent target and that they were less concerned about a global economic slowdown.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor markets continued to strengthen, and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds in June,” according to the minutes.

The dollar received its final boost for the week from comments by New York Federal Reserve President William Dudley. “We are on track to satisfy a lot of the conditions” for a rate increase, Dudley said. He added, though, that a key factor arguing for the Fed biding its time a little was the potential for market turmoil around Britain’s vote in late June about whether to leave the European Union.

The June US. Dollar Index finished the week at 95.343, its highest March 29, up 0.75 or +0.79%.

The EUR/USD closed the week at 1.1222, down 0.0081 or -0.72%. Sandwiched between bank holidays and the start of the G7 meetings was the Euro Zone CPI report and European Central Bank Monetary Policy Meeting Accounts. Final CPI y/y and Final Core CPI y/y came in as expected at -0.2% and 0.7% respectively.

The GBP/USD had a volatile week before closing at 1.4497, up 0.0143 or 1.00%. Most of the gains were attributed to diminished momentum in “Brexit” sentiment. Market participants are trading on the headlines and reacted positively when the latest poll suggested a lead for the U.K. to remain a member of the European Union.

A survey by Ipsos Mori revealed that 55% of respondents were in favor of staying with the European Union while 37% wanted to break away.

The rate of expansion in Britain’s labor market slowed down in April, amid signs that uncertainty surrounding the upcoming European Union referendum might be taking its toll. Data showed the number of people in employment rose by 44,000 to 31.6 million in the first three months of 2016. Unemployment fell by 2,000 to 1.69m in April, leaving the unemployment rate unchanged at 5.1%, the lowest rate since early 2006.

The rising U.S. Dollar pressured the Japanese Yen, alleviating the need for an intervention by the Bank of Japan. The USD/JPY finished the week at 110.084, its highest close since April 27. Early in the week, government data showed Japan’s output grew 1.7 percent in the first quarter. That was stronger than many economists predicted, and ensured the country avoided slipping into a recession. However, experts think the rebound will not be strong enough to dispel fears of a contraction later this year.

At the G7 meeting that wrapped up over the weekend, U.S. Treasury Secretary Jacob Lew kept up the pressure on Japan not to devalue its currency after repeated threats by Tokyo to intervene in forex markets to tame a resurgent yen.

The Australian, New Zealand and Canadian Dollars were pressured last week as demand for dollar-denominated commodities fell. The AUD/USD finished at .7220, down 0.0045 or -0.62%. Early in the week, the Aussie was boosted by the Reserve Bank of Australia minutes which suggested a rate cut many not be imminent.

The NZD/USD recovered after weakness early in the week to close unchanged at .6759. Traders are still debating whether there is enough economic evidence to warrant an interest rate cut next month.

The USD/CAD continued to strengthen despite slightly higher crude oil prices. The Forex pair finished the week at 1.3109, up 0.0172 or +1.33%. Most of the rally was attributed to a possible Fed rate hike in June.

Canada’s inflation rate rose to an annual rate of 1.7 percent in April as higher prices for food and shelter contributed to a higher cost of living. Statistics Canada said that seven of the eight sectors of the economy the data agency monitors saw rising prices.