Dollar’s Climb Stalls Amid Mixed Economic Signals

A flurry of mixed economic data is dragging on the US dollar, stalling a rally that has spread throughout the economy and financial markets.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is down about 2% from its May peak and down 1.1% last month. That drop broke off a steady march that sent the dollar to multiple highs. The index gained 0.6% last week, breaking a two-week losing streak.

Behind the slide was a slight shift in the economic landscape. According to recent economic reports, US consumers are still spending money at a rapid rate, while employers continue to add jobs, extending a trend that has helped the dollar strengthen in 12 months. via.

However, there have been signs of weakness elsewhere. Wage growth has been revised down from last year, and consumers were able to sustain their spending simply by switching to savings. The US services sector, which includes restaurants and travel, slowed its expansion in May and new home sales in April fell by the most in nine years.

Overall, the data dimmed some asset managers’ outlook on the US economy. Now they are wary that the Federal Reserve may have to slow the pace of expected rate hikes. That may be welcomed by stock investors, who are acutely aware of the risks that rising rates pose to high-value stocks, but the implications are worse on currency market.

Investors often buy currencies related to countries where central banks are raising interest rates to rein in a hot economy. Investors expect the Fed to raise rates by a total of one percentage point in June and July, but what happens after that is more difficult to determine. As a result, traders now consider the dollar to be more sensitive than usual to impending economic releases.

“The market has gone through six weeks thinking this is the limit for the Fed,” said Steve Englander, head of North American macro strategy at Standard Chartered. Now, he says, “I think the dollar has topped.”

The bleak outlook represents a shift in markets, after investors bet the rapid pace of rate hikes would send the dollar higher throughout the year. Many expect a strong dollar to hurt US multinationals, by making their products more expensive for foreigners, with companies including Microsoft Corp.

noted the strong impact of the dollar on revenue in recent reports. JPMorgan analysts say a stronger dollar is hurting the US manufacturing sector, which is slowing hiring to make up for fewer exports.

Over the next week, investors will scrutinize Friday’s US consumer data and inflation numbers for clues about the state of the economy and the trajectory of the stock market. Lower inflation numbers could ease pressure on equities and hit the dollar more, as the Fed takes a gradual approach. The Bank of England sparked a sharp drop in the pound by signaling caution when it comes to rate hikes in May.

Investors are now watching US data for similar signs of a slowdown. Last week, the Labor Department reported that the economy added 390,000 jobs in May – higher than the 328,000 expected by economists. However, the unemployment rate remained at 3.6%, instead of falling to 3.5% as expected. Average monthly hourly earnings growth was 0.3%, lower than the 0.4% consensus forecast.

The foreign exchange market was at its most volatile in more than a decade after a strong dollar sent other currencies lower, and as central banks around the globe tackled soaring inflation. The WSJ Dollar Index recently lifted this year’s gains to about 6%.

The currency follows short-term interest rate moves, which fluctuated rapidly in March as investors bet the Fed would raise rates by half a percentage point or more through at least the meeting. from July 26 to 27. Yields on the benchmark two-year US Treasury note rose nearly 0.9 percentage points in March alone, the biggest monthly gain since 1989.

Investors are now looking ahead to September, when the central bank will convene several months of 2022 data. With officials mostly agreeing on the need for a half-point increase at the June policy meetings. and July Fed, recent comments from Fed officials suggest the debate has turned to what should happen next. Traders say the dollar is sensitive to any change in the size of the exchange rate path.

Recent stock market performance has someone talking about a possible recession in the US. So what are the top economic indicators that are solid recession trackers, and what can you do to prepare for a recession? WSJ’s Dion Rabouin explains. Illustrated by: David Fang

One thing investors are watching is the housing market, which is trying to gauge the impact of tighter lending conditions. There are signs that the US market is cooling off as rising mortgage rates make home ownership more expensive. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage was 5.09% last week, up from 3.1% at the start of the year.


What is your outlook on dollar strength this year? Join the conversation below.

Fluctuations in the stock market have decimated investment accounts. Higher energy costs could curb consumer spending, slow growth and hurt the dollar.

Andrzej Skiba, head of U.S. BlueBay fixed income at RBC Global Asset Management, lacked the dollar, betting on a decline in its value against other currencies. But he thinks recent recession concerns have gone too far and will consider buying when prices fall.

“It’s not clear that we’ve seen the end of the secular power of the American economy,” Skiba said.

—Sam Goldfarb contributed to this post.

Write to Julia-Ambra Verlaine at

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