US dollar index strengthens as market rethinks monetary policy outlook

The U.S. dollar rose against the euro and sterling on Thursday and set a more than one-week high against a basket of its major peers as traders sought safety after a series of economic data prompted a reassessment of their outlook for global monetary policy.

The number of Americans filing new claims for unemployment benefits jumped to a 1-1/2-year high last week, pointing to cracks in the labor market as demand slows, potentially giving the Federal Reserve room to halt further interest rate increases next month.

U.S. producer prices, on the other hand, showed a moderate rise last month, posting the smallest annual increase in producer inflation in more than two years, further evidence that inflation pressures were easing.

The producer price index for final demand rose 0.2% last month. In the 12 months through April, the PPI increased 2.3%. That was the smallest year-on-year rise since January 2021 and followed a 2.7% advance in March.

"I think the market is starting to rethink the outlook for the Fed cutting rates after inflation, while lower, remained on the high side. The dollar stands to gain if markets pull rate cuts off the table, a scenario that would allow it to retain its yield advantage for longer," said Joe Manimbo, senior market analyst, at Convera in Washington.

"After the ECB and the Bank of England, you start to get the sense that any further rate hikes from Europe might be more modest in scope than previously thought. If some people are questioning the Fed cutting rates, and at the same time the market sees less upside for interest rates abroad, that helps to level the playing field when it comes to foreign exchange."

The dollar index, which tracks the U.S. currency against six major peers, rose 0.7% to 102.06, its highest showing in more than a week.

Sterling, fell to a one-week low of $1.2497, down 0.9% in afternoon trading, while the euro fell to a one-month low at $1.09, or down 0.6%.

U.S. data followed earlier release from China showing more evidence of weakness in its post-COVID recovery.

"The Chinese data overnight was a little surprising. And if you couple that with the reopening hype that's been going on for a few months, let's be honest, it just really hasn't happened," said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull in Toronto. "So, it just felt like a reaction to take off risk more broadly...Let's buy the dollar. Put on some safer bets, or unwind some of the riskier bets."

Fed funds futures traders are still pricing in a pause before expected rate cuts in September. The Fed's target range stands at 5% to 5.25%. ,