US Dollar Bounces Back, But Set to Drop for Second Consecutive Month

The U.S. dollar started relatively stronger in the last trading week of April 2023, registering its first weekly gain in more than thirty days. However, it was still on track for a second consecutive monthly loss, as investors remain skeptical of the steep increases in interest rates.

The dollar index, which measures the value of the U.S. dollar relative to a basket of top 6 currencies (EUR, JPY, GBP, CHF, CAD, and SEK) increased by 0.13 percent to 101.81, though it was on track for a monthly loss of over 0.7 percent, after having fallen by over 2 percent in March. 

The U.S. dollar witnessed an increase against most of these major currencies in Asia trade, with the Euro and Sterling falling 0.07 percent to $1.0981 and 0.06 percent to $1.2437, respectively. The Australian dollar, on the other hand, fell 0.29 percent to $0.6674.

U.S. Dollar rebounds from the year’s low After hitting its 20-year high towards the end of 2022,  the U.S. dollar has been under pressure on concerns that the U.S. economy could be heading toward a recession. It finally hit a 1-year low (100.78 dollar index) on Friday, 14 April 2023. After that, the rebound started with a spate of positive news – the New York state factory activity in April increased for the first time in five months. As a result, in the last 10 days U.S. dollar index has recouped by about 1% finally starting the last trading week on a positive note.

Business activity in the U.S. and Eurozone improves

Further, data released on Friday, April 21, indicated that business activity in the U.S. and Eurozone gathered steam in April, allaying concerns about a possible recession in major economies. Ray Attrill, head of FX strategy at National Australia Bank, said, “ The takeaway from the various PMIs is that the services sector both in Europe and the U.S. seems to be pretty resilient.” However, as the fall in the first half of April was sharp, the overall U.S. dollar is expected to close this month also on a loss.

Fed likely to continue rate hike in May 

It is expected that the Fed will probably announce another 25 basis points (bp)  increase in interest rates in its next FOMC meeting scheduled next week (May 3). But this may well be the last of the interest rate hikes. Talking of Central Banks around the world, there is a general sentiment that the European Central Bank (ECB), which also meets next week, could increase rates by a quarter point, though a 50 bp increase cannot be ruled out. 

In Asia, the Bank of Japan’s (BoJ) policy meeting in the week starting April 24 attracts investors’ attention as it would be the first meeting chaired by its new governor Kazuo Ueda. Most feel that the bank would leave the rates unchanged given Ueda’s assurance that policy changes won’t be quick. However, traders have been looking forward to a series of central bank policy meetings for a possible indication of how soon the sharp increases in interest rates around the globe could be contained. It is also being debated, that after a brief pause, a series of interest rate cuts may start from July onwards. 

Outlook

In spite of the recent rebound from the year’s low, U.S. Dollar is expected to close with a loss for the second consecutive month after March. However, the fears of impending recession have been allayed as there has been improvement in the services sector as well as factory output as per the latest data released. While the Fed is likely to continue with the rate hike in the next meeting, speculation is rife about the trend to reverse soon after a brief pause post the next meeting.