Dollar Rebounds Ahead Of Fed Review

(RTTNews) - The week ended July 21 witnessed renewed Fed jitters causing the U.S. dollar to reverse a two-week slide and rebound against major currencies. The U.S. dollar gained against the euro, pound, Australian dollar as well as the Japanese yen amidst indications of continued consumer and labor market resilience in the U.S. Data showing lower-than-expected additions to payroll and lower-than-expected inflation had caused the greenback to retreat against major currencies over the past two weeks.

The Fed is scheduled to review its target rates in the two-day review concluding on July 26 and is widely expected to raise rates by 25 basis points. Speculation about the Fed's likely course of action in the reviews scheduled for September, November and December were boosted with the retail sales update from the U.S. on Tuesday. The upwardly revised retail sales reading for May contributed to the dollar's surge, quelling the disinflationary narrative that had gained momentum in the previous week with the drop in inflation. An unexpected drop in initial jobless claims for the week ended July 15 also renewed Fed fears, boosting the Dollar.

Fear of interest rates in the U.S. remaining higher for longer lifted the U.S. dollar and the DXY or the Dollar Index, which measures the dollar's relative strength. The DXY increased steadily over the course of the week, rising from the low of 99.59 on Monday to a high of 101.19 on Friday. The DXY added 1.2 percent during the week, rising to 101.07, from 99.91 a week earlier. The Dollar Index had in the previous week plunged below the 100 level for the first time since April 2022 supported by a more than expected cooling in consumer price inflation and producer price inflation.

The euro depreciated 0.9 percent against the U.S. dollar during the week ended July 21. The EUR/USD pair closed the week at 1.1123 versus 1.1227 on July 14 amidst expectations of the ECB raising rates again in the ensuing review on Thursday. However, uncertainty lingered over future rate hikes. The week's trading range was between 1.1277 and 1.1107.

The sterling dropped 1.8 percent to the U.S. dollar during the past week as a positive surprise on the inflation front eased rate hike expectations by the Bank of England. Headline inflation in the U.K. fell to 7.9 percent in June, from 8.7 percent in the previous month and expectations of a decline to 8.2 percent. Core inflation, which was expected to be steady at 7.1 percent dropped more-than-expected to 6.9 percent. Producer price inflation in the U.K. also touched levels last seen in December 2020. The sterling closed at $1.2855 from $1.3086 a week earlier, after touching a high of $1.3127 and a low of $1.2816 over the course of the week. A more-than-expected retail sales reading helped limit sterling's losses that followed the latest inflation update.

The Australian dollar too shed 1.6 percent against the U.S. dollar during the week ended July 21 amidst Fed fears that boosted the U.S. dollar. China's weak GDP growth in the second quarter also dragged down the Australian dollar, given the historic trade links between the two countries. Minutes of the Reserve Bank of Australia that hinted at more rate hikes and higher-than-expected employment data, limited losses triggered by the weak Chinese data. The AUD/USD pair closed at 0.6727 on Friday, July 21 versus 0.6837 a week earlier. The pair touched a high of 0.6888 on Monday and a low of 0.6722 on Friday.

The USD/JPY pair closed at 141.79 versus 138.73 a week earlier resulting in a weekly decline of more than 2.2 percent for the Japanese yen. The pair touched a high of 141.97 and a low of 137.70 during the past week. A rise in inflation capped losses as markets speculated on whether the Bank of Japan would tweak its yield control policy or embark on a path of monetary tightening.

Currency markets are bracing for monetary policy reviews by major central banks. On the horizon are interest rate decisions by the Federal Reserve on Wednesday, the European Central Bank and Bank of Japan on Thursday and the Reserve Bank of Australia and Bank of England in the next week. The Dollar Index is currently at 101.52. The EUR/USD pair is hovering near 1.1032, whereas the GBP/USD pair is close to 1.2834. The AUD/USD pair is currently trading near 0.6772. The USD/JPY pair's current level is 141.37.