U.S. Dollar Tumbles after Weak Data Raises Concerns Over Interest Rates

The U.S. Dollar tumbled last week against a basket of currencies, however, the loss was less than 1.00%, because the market had been trending lower for several weeks. The story of the week was actually the Australian Dollar which soared against the U.S. Dollar, gaining a whopping 2.96%.

September U.S. Dollar Index futures settled at 94.93, down 0.862 or -0.90%.

Friday’s sell-off by the dollar was just the icing on the cake last week for bearish traders. The selling actually started on Tuesday after President Donald Trump’s eldest son released an email chain citing Russian support for his father before last year’s U.S. election.

The situation with Trump’s son highlighted the dysfunction in Washington and the Trump administration’s inability to pass any meaningful legislation, particularly healthcare reform, tax reform and increased infrastructure spending. The selling of the dollar likely represents a loss of confidence in Trump’s ability to grow the economy.

The second wave of selling against the dollar occurred on Wednesday after Federal Reserve Chair said interest rate hikes would be gradual and that the U.S. central bank may not be able to raise rates by “all that much.”

She also said the U.S. economy remains strong enough for the Fed to continue its plans to gradually tighten policy, but shook up the financial markets when she raised concerns over the relatively low inflation. Her statement came at a time when the dovish Fed board members started talking about possibly stalling the tightening process until inflation is closer to target.

The dollar was hit for a third time on Friday following the release of weaker than expected U.S. economic data. U.S. government data showed consumer inflation was unchanged in June and retail sales fell for a second straight month. This news raised doubts about U.S. economic growth and whether the Federal Reserve would raise interest rates again in 2017.

Australian Dollar

The Australian Dollar rallied to its highest level since April 2016 and closed in a position to continue the move next week. The widening of the spread between Australian and U.S. government bonds was the catalyst behind the rally. Falling U.S. Treasury yields relative to the high Australian bond yield made the Australian Dollar a more attractive investment.

Stronger Chinese trade data also underpinned the Aussie.

The AUD/USD settled the week at .7825, up 0.0225 or +2.96%.

New Zealand Dollar

The New Zealand Dollar rose in response to falling U.S. Treasury yields along with speculation the Reserve Bank of New Zealand may be more inclined to hike interest rates in the face of price appreciation and hawkish talk from other central banks. Stronger Chinese trade data also underpinned the Kiwi.

The NZD/USD finished the week at .7345, up 0.0065 or +0.90%.

Japanese Yen

The Dollar/Yen declined more than 1 percent despite starting the week higher after disappointing U.S. economic data supported the concerns expressed this week by several Fed policymakers, including Fed Chair Janet Yellen about the muted inflation since February.

The USD/JPY ended the week at 112.513, down 1.384 or -1.22%.

Up until about mid-week, the interest rate differential had been widening in anticipation of tighter monetary policy by the Fed. Traders were also responding to the obvious divergence between the Bank of Japan, which favors a loose monetary policy, and the U.S. Federal Reserve, which favors a tight monetary policy.