Dollar Strengthens as US Consumer Sentiment Dips, Fed Officials Weigh Rate Cuts

The US dollar strengthened on Friday, May 10, 2024, following a reading on US consumer sentiment that came in at a six-month low. The dollar index rose 0.15% to 105.38, with the euro slipping 0.18% to $1.0762.

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Dollar Strengthens as US Consumer Sentiment Dips, Fed Officials Weigh Rate Cuts

Dollar Strengthens as US Consumer Sentiment Dips, Fed Officials Weigh Rate Cuts

The US dollar gained ground on Friday, May 10, 2024, following a reading on US consumer sentiment that came in at 67.4, a six-month low. The University of Michigan's consumer sentiment index also showed that one-year inflation expectations climbed to 3.5% from 3.2%. The dollar index, which measures the greenback against a basket of six major currencies, rose 0.15% to 105.38, with the euro slipping 0.18% to $1.0762.

Why this matters: The dollar's strength and shifts inmonetary policy rates have significant implications for global trade and investment, as they can influence the attractiveness of US assets and the competitiveness of American businesses abroad. Furthermore, the Federal Reserve's decisions on interest rates can have far-reaching consequences for economic growth, employment, and inflation, both domestically and internationally.

The dollar's strength comes amid mixed signals from Federal Reserve officials on the future path of interest rates. Dallas Federal Reserve President Lorie Logan stated that it was not clear if monetary policy was tight enough to bring inflation down to the central bank's 2% target and that it was too soon to be cutting interest rates. However, Atlanta Federal Reserve President Raphael Bostic said the Fed likely remained on track tocut rates thisyear, even if the timing and extent of the policy easing were uncertain.

Markets are currently pricing in about 50 basis points of rate cuts in 2024, with a 62.2% chance for a cut of at least 25 basis points in September, according to CME's FedWatch Tool. The dollar's gains on Friday put it on track for its first weekly advance after two consecutive weeks of declines. The greenback strengthened 0.23% to 155.82 against the Japanese yen, marking a weekly gain of about 1.8% against the currency. Sterling weakened 0.11% to $1.2508 after earlier reaching $1.2593.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, emphasized the importance of observing how markets respond to fundamental news, stating,"What I really watch is how the markets respond to fundamental news and, to me, that really reflects psychology. "Chandler added,"It got a series of soft economic data, and even though each piece could be explained away or downplayed, the combination of it and the way the market reacts now, it's sensitive to softer data than stronger data. We'll see next week with the CPI."

Investors will closely monitor key inflation data next week, including the consumer price index (CPI) and producer price index (PPI), as well as retail sales figures. These readings will provide further insight into the state of the US economy and potentially influence the Federal Reserve's monetary policy decisions in the coming months. The dollar's performance against major currencies will likely remain sensitive to economic data releases and shifts in market expectations regarding the timing and magnitude of potential interest rate adjustments.