USD posted its third consecutive weekly gain last week and is currently trading at seven-week high levels. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.77% on weekly basis closing at levels of 95.33. The gain came on the back of strong U.S. economic data released last week making a strong case for the Fed to hike interest rates as soon as next month.
Fed’s April meeting minutes released on Wednesday provided support to the USD, the minutes showed that the officials said a June rate hike would be appropriate if economic data indicated that growth was picking up in the second quarter and employment and inflation were firming.
Off late, Fed officials have been vocal about rate hikes, which are fuelling the expectation for a second rate hike in June. Read our latest “Weekly Global Bond Yield Movement Analysis on Fed Rate Hikes”. Fed first hiked rates by 25bps in December 2015 after a gap of eight years to take up the policy rate from a range of 0% to 0.25% to 0.25% to 0.50%.
USD started the week on a slightly lower note after weak manufacturing activity data released on Monday fuelled concerns over the strength of the economy. Data showed that the Empire State manufacturing activity index fell to -9.02 in the month of May from 9.56 in April and against the expectation for the index to fall to 6.50.
However, upbeat data released on Tuesday boosted optimism over the strength of the economy. U.S. Commerce Department reported that housing starts rose 6.6% to 1.172 million units in the month of April against the expectation for an increase to 1.127 million units. The report also showed that building permits rose 3.6% to 1.116 million units in the month of April against the expectation of a rise of 4.3%.
U.S. consumer price data showed that prices rose by 0.4% in the month of April, the biggest one-month gain since February 2013. The annual rate of inflation rose to 1.1% last month from 0.9% in March. Core inflation came in at 2.1% on yearly basis, slightly above the Federal Reserve’s inflation target.
Data also showed that U.S. industrial production increased by 0.7% in the month of April which is its largest gain since November 2014 and better than the expectations for a gain of 0.3%.
U.S. Department of Labour reported that number of individuals filing for initial jobless benefits in the week ended 6th May fell by 16,000 to 278,000 from the previous week’s total of 294,000 against the expectation of a decline of 19,000 to 275,000.
Federal Reserve Bank of Philadelphia on Thursday reported that its manufacturing index deteriorated to -1.8 in May from April’s reading of -1.6 against the expectation for the index to improve to 3.5 in May.
U.S. National Association of Realtors said existing home sales rose 1.7% in the month of April to 5.45 million units from 5.36 million units in March against the expectation of a rise of 1.3% to 5.40 million units.
Brazilian Real appreciated by 0.35% last week against USD. Brazilian Real defied the downbeat mood in emerging market currencies by strengthening against the USD as the market is expecting that the appointment of interim president Michel Temer would bring a change in the country’s economic fortunes.
Japanese Yen depreciated by 1.38% last week against USD despite data showing that Japan’s economy grew at the fastest pace in a year in the first quarter of 2016. Market participant’s bet on more stimulus that will be required to keep up momentum in the economy leading to the fall in the Yen. Japan’s economy grew by an annualized 1.7% in the three months to March, well ahead of forecasts for a 0.2% increase. The growth was against a 1.7% contraction in the previous quarter.
Asian currencies closed down against the USD last week on broad USD strength. Australian Dollar depreciated by 0.67%, New Zealand Dollar depreciated by 0.15%, Japanese Yen depreciated by 1.38% against USD and by 0.63% against Euro. South Korean Won depreciated by 1.57%, Philippines Peso depreciated by 0.41%, Indonesian Rupiah depreciated by 2.08%, Indian Rupee depreciated by 1.00% against USD and appreciated by 0.19% against Euro, Chinese Yuan depreciated by 0.26%, Malaysian Ringgit depreciated by 1.26% and Thai Baht depreciated by 0.57%.