SINGAPORE – The dollar caught its footing on Thursday as strong U.S. retail data cast doubt on market bets that inflation is in retreat and U.S. interest rates need not rise too much further.
The euro was also firm after NATO said a missile that crashed inside Poland was probably a stray fired by Ukraine’s air defences, and not a Russian strike.
At $1.0394, the euro was close to breaking above its 200-day moving average. The Australian and New Zealand dollars fell slightly overnight, in response to the U.S. data, and were steady in morning trade on Thursday.
The Aussie last bought $0.6742 and the kiwi $0.6152. The Japanese yen hovered at 139.25 per dollar, while the Chinese yuan nursed losses at 7.1033 per dollar after China’s central bank promised to keep local liquidity ample and to guide commercial loan growth.
On Wednesday U.S. data showed October retail sales rose 1.3 percent, compared with economist expectations for 1 percent, a healthy signal but one that dented hopes for a pause in rate increases.
“Markets have positioned for the Fed to pivot,” said Commonwealth Bank of Australia currency strategist Kim Mundy. “The U.S. retail sales data very much challenges that narrative … the U.S. economy is driven by the consumer and if the consumer is still spending, it suggests it’s going to take inflation longer to ease.”
This year’s long rally in the U.S. dollar made a sharp reversal last week when U.S. inflation came in a bit cooler than expected and stoked bets the pace of price rises has peaked.
Hawkish remarks from Federal Reserve officials overnight also put some cold water on hopes for a shift, though, with San Francisco Fed President Mary Daly – until recently one of the most dovish officials – saying a pause was off the table.
Kansas City Fed President Esther George told the Wall Street Journal that policymakers must be “careful not to stop too soon” on rate increases and that avoiding a recession might be difficult.
The Treasury market is indicating a slowdown is expected, with 10-year U.S. government bonds yielding 67 basis points less than two-year bonds and that gap nearing levels last reached in 2000.
The Aussie dollar didn’t catch much of an immediate boost from stronger-than-expected jobs data. Sterling was steady at $1.1918 in Asia. The U.S. dollar index found support at 106.31, after falling as low as 105.3 on Tuesday.
It is up 11 percent this year.
Later on Thursday the British finance minister is due to provide a budget update, with markets focused on what the timing of government spending cuts might mean for inflation and rates.
Comments from a number of Fed and other central bank officials will also be closely watched. Indonesia’s central bank meets to set policy and a 50 basis point hike is expected.