The US Dollar (USD) approached a six-month high during early European trading on Friday. This strengthening was a result of positive US economic data, while the Chinese yuan also received a boost from better-than-expected data from China.
Market conditions are adjusting to a new outlook for central bank rate hikes. The European Central Bank (ECB) recently raised rates to a record high of 4%, but indicated that this hike is likely the last. This has led to a decline in euro zone bond yields and the euro as investors anticipate rate cuts next year.
Currently, the focus in currency markets is on the divergence between the ECB’s and the US Federal Reserve’s monetary policy plans. This divergence suggests potential upside for the US dollar, as the Fed faces pressure to consider higher interest rates while other central banks are already pricing in peak rates.
As of 0756 GMT, the US dollar index was slightly down 0.2% on the day at 105.22, easing from its six-month peak on Thursday. Nevertheless, it is on track for its ninth consecutive weekly gain.
US retail sales for August exceeded expectations, driven by increased gasoline prices, resulting in higher receipts at service stations.
The euro slightly recovered from its multi-month low on Thursday and was up 0.2% at $1.06625.
Market experts believe that EUR/USD will be more heavily influenced by the dollar leg moving forward. The market has already factored in the notion that the ECB has likely reached its peak, meaning that euro zone data releases may lose some market relevance.
In early Asian trading, China’s yuan received a boost from better-than-expected economic data. Industrial output and retail sales both grew at a faster rate in August. However, downward pressure on the yuan persists, as China’s economic recovery remains uncertain. The US dollar was down approximately 0.2% against the offshore yuan.
The Australian and New Zealand dollars, which are considered risk-sensitive currencies, also experienced some gains. The Australian dollar was up 0.3% at $0.64575, while the New Zealand dollar was up 0.1% at $0.5917. Commodity currencies in general have benefitted from rising energy prices, with oil set to gain for the third consecutive week.
Meanwhile, the British pound increased by 0.2% against the US dollar, reaching $1.2438.
The US dollar also gained 0.2% against the Japanese yen, reaching 147.745.