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The dollar surged to a five-month high against the euro on Tuesday after a speech by Federal Reserve Chairman Jerome Powell hinted at the need to keep interest rates higher amid persistent inflationary pressures.
Meanwhile, the dollar peaked against the yen, posting its strongest performance since 1990, sparking speculation among traders that Japanese authorities may intervene.
The dollar’s gains were supported by strong growth indicators, especially the release of March retail sales data, which beat market expectations. Contrary to previous forecasts, persistence of inflationary pressures weakened prospects for an imminent Fed rate cut.
Juan Perez, trading director at Monex USA in Washington, highlighted the resilience of the U.S. economy, saying: “The thought in Q4 was that we were going to have a slowdown in the U.S., but the evidence suggests the opposite is true.”
In recent speeches, Powell acknowledged that no significant progress has been made toward the 2% inflation target this year and expressed caution about the timetable for achieving expected confidence levels.
Traders responded by recalibrating their expectations for the timing of potential rate cuts, with consumer price data for March beating economists’ forecasts. Rate cut expectations have been revised downwards, with fewer than two quarter-point cuts expected this year, compared with the previous forecast of three cuts. The first rate cut is now expected to come in September, contrary to previous expectations for June.
Escalating geopolitical tensions between Israel and Iran have further enhanced the dollar’s appeal, prompting investors to seek refuge in the greenback.
Juan Perez said of the U.S. dollar’s safe-haven status, “We’re very insulated from a lot of the issues in foreign exchange overseas, and now this weekend we finally see a major upgrade… which makes the U.S. dollar Become a safe currency” a safe haven unlike anywhere else. ”
The situation in the Middle East remains unstable, with Israel’s war cabinet meeting to discuss how to respond to an unprecedented direct attack by Iran. International pressure is mounting to de-escalate the situation, but Israeli government sources confirmed that a meeting originally scheduled for Tuesday had been postponed to Wednesday.
