US dollar index hits nearly two-week high before Fed meeting, jobs data

The dollar rose to an almost two-week high against a basket of currencies on Monday before the Federal Reserve is expected to hike interest rates by an additional 25 basis points and after data showed that U.S. manufacturing pulled off a three-year low in April.

Investors will focus on whether the U.S. central bank indicates that it expects to pause rate increases after May, or if it keeps alive the possibility of an additional hike in June or later when it concludes its two-day meeting on Wednesday.

“Many people say the Fed will signal that it’s going to pause, and I don’t think it can afford to do that,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, adding that “the Fed wants to maintain some optionality and flexibility.”

Inflation is seen as possibly keeping the Fed in a tightening cycle if it remains high, assuming that the labor market and other parts of the economy remain solid.

The greenback rose after the Institute for Supply Management (ISM) said on Monday that its manufacturing PMI rose to 47.1 last month from 46.3 in March, which was the lowest reading since May 2020.

"Broadly, the data show that the manufacturing sector is still in a recession, but there are some encouraging signs of stabilization in the details," Thomas Simons, a money market economist at Jefferies, said in a note.

Other data on Monday showed that U.S. construction spending increased more than expected in March, boosted by investment in nonresidential structures, but single-family homebuilding remained depressed amid higher mortgage rates.

The dollar had gained on Friday after data showed that core inflation stayed elevated in March. Consumer price inflation data next week will be watched for further signs of inflation remaining high.

Jobs data on Friday is this week’s main economic focus. It is expected to show that employers added 180,000 jobs in April. (USNFAR=ECI)

The dollar index was last up 0.41% on the day at 102.13 after reaching 102.19, the highest since April 19. The euro fell 0.43% to $1.0970. The single currency is holding just below a one-year high of $1.1096 reached last Wednesday.

The European Central Bank (ECB) is widely expected to raise rates for the seventh straight meeting on Thursday, with a 50 basis points increase on the table.

The yen continued to weaken against the dollar after the Bank of Japan on Friday kept ultra-low interest rates but announced a plan to review its past monetary policy moves.

The dollar was last up 0.84% at 137.46 yen , the highest since March 8.

The Reserve Bank of Australia is also widely expected to extend a rate pause on Tuesday.

The Aussie dollar gained 0.20% to $0.6630. It is up from a seven-week low of $0.6573 on Friday.