Concerns about U.S. Economy Weigh on Dollar
Producer Prices Impact Dollar’s Strength
The dollar declined on Friday following concerns about the U.S. economy as producer prices exceeded expectations. The surge in producer prices, reported by the Labor Department, was the largest in five months. This raised expectations that the Federal Reserve would delay interest rate cuts until at least mid-year. The dollar retreated amidst these developments.
Impact of U.S. Retail Sales and Economic Data
Thursday’s data on U.S. retail sales for January showed the sharpest drop in 10 months. This suggested a slowdown in consumer spending, with sales being revised lower in the previous two months as well. This raised questions about the real activity in the U.S. economy, leading to a cautious approach in the currency market.
Market Reaction and Interest Rate Expectations
The currency market’s reaction to the economic data was unusual, with some attributing it to positioning ahead of the long U.S. holiday weekend. Interest rate expectations also diverged between the currency and Treasury markets. Fed funds futures indicated low odds of a rate cut in March, a significant shift from earlier predictions at the beginning of the year.
Yield Movement and Dollar’s Potential
The yield on two-year Treasury notes rose, reflecting the evolving interest rate expectations. Despite the resilient U.S. labor market and stronger economic growth, the dollar’s potential was seen as higher than its current value. This indicated the likelihood of sideways trading or a gradual uptick for the dollar.
Performance of Major Currencies
The euro saw a slight increase, while the yen weakened against the dollar. The yen’s decline against the dollar was attributed to reduced expectations of Fed rate cuts, causing it to drop by 6.5% this year. The market remained vigilant for potential intervention by Japanese authorities to weaken the yen.
U.S. Housing Market and Consumer Sentiment
A separate report highlighted a drop in U.S. single-family homebuilding in January, likely due to harsh weather. However, the increase in permits for future construction indicated a potential rebound in the coming months. Additionally, the U.S. consumer sentiment survey showed little change in February, with a slight uptick in one-year inflation expectations.