Despite a minor decline in trading on Friday, the U.S. dollar was anticipated to close the week with gains for the third week running, supported by unexpectedly solid economic reports that dampened prospects of early monetary easing by the Federal Reserve.
At 04:05 ET (09:05 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, dipped slightly by 0.1% to 99.095. However, this was still consistent with an approximately 0.2% gain for the week overall.
The recent positive momentum in the dollar is largely attributed to economic data outperforming forecasts, which helped reshape market expectations around interest rate policies. Notably, initial jobless claims in the U.S. unexpectedly fell to 198,000 last week, markedly below the predicted 215,000 level, underscoring continued robustness in the labor market.
This strengthening in employment metrics has contributed to a consensus among investors that the Federal Reserve will maintain current interest rates for an extended period. Consequently, traders have pushed back their forecasts for the first rate reduction to around mid-2024.
Analysts from ING characterized the dollar's ascent this week as a broad macroeconomic trend. They highlighted that stronger-than-expected data points, such as retail sales and employment claims, combined with the Federal Reserve's Beige Book report describing a moderately growing economy and a stable jobs environment, supported the currency's firm stance.
Further comments from Federal Reserve officials have reinforced this cautious approach. Chicago Fed President Austan Goolsbee emphasized the importance of addressing inflation amid evident labor market stability. Similarly, Kansas City Fed President Jeff Schmid described inflation as still excessively high, whereas San Francisco Fed President Mary Daly noted that recent economic data appeared promising.
With a relatively subdued economic calendar ahead, ING suggested there was no significant pressure to challenge the dollar's steady gains at present.
Turning to Europe, the euro inched higher against the dollar, trading at 1.1613, following data that revealed German consumer prices held steady in December, registering a modest 1.8% increase over the year—below the European Central Bank's 2.0% medium-term inflation target.
The ECB has paused interest rate adjustments since concluding a phase of rapid hikes in June and recently indicated no immediate plans to alter policy. This stance is grounded in unexpectedly strong economic growth and a diminishing inflation threat.
According to ING, the lack of significant economic data releases in the eurozone suggests EUR/USD may gradually decline towards the 1.1555–1.1565 range without pronounced volatility.
The British pound saw a slight uptick, moving 0.1% higher to 1.3392 USD.
In Asia, the Japanese yen recovered modestly from near 18-month lows, causing USD/JPY to fall 0.3% to 158.19. Japanese authorities' verbal interventions were a factor, as Finance Minister Satsuki Katayama indicated that Japan remains open to various measures, including potential coordinated actions with the United States, to address yen depreciation.
ING highlighted the expected volatility in USD/JPY over the coming month, noting that current market prices do not imply especially high volatility despite one-month implied volatility trading around 8.5%.
Other currency pairs saw minor movements, with USD/CNY up 0.1% to 6.9681, AUD/USD rising 0.1% to 0.6704, and NZD/USD increasing 0.3% to 0.5760.