Euro-Dollar Rate Reaches New One-year Peak

Above: Euro to Dollar exchange rate (EUR/USD) at daily intervals.

The euro is extending its gains today, climbing to a fresh one-year high of $1.1075.

Sterling is steady around $1.2510, while the Aussie is paring some of yesterday’s advances.

The U.S. dollar has taken quite a beating since the banking crisis, which increased the risk of a recession in America on the expectation that the turmoil would tighten credit conditions across the economy.

Although the panic has subsided and Fed officials appear less worried about a downturn than they were at the March meeting, which took place at the height of the crisis, most of the data now seems to be pointing to declining momentum in both growth and price pressures, potentially due to the effects of the Fed’s previous rate hikes starting to kick in.

The latest figures on consumer and producer prices added to the softening economic picture highlighted by last week’s ISM PMIs, the upbeat March jobs report is now seen as the outlier.

Wednesday's weaker-than-expected CPI data was followed by similarly weak PPI numbers on Thursday.

Factory gate inflation decelerated sharply in March, with almost all readings coming in both below the forecasts and the prior month’s figures.

In addition, weekly jobless claims ticked back up to 239k towards recently revised highs, in a further sign that the US economy appears to have lost some steam.

This puts the spotlight on today’s retail sales report.

The forecasts are already quite grim as retail sales are projected to have fallen by 0.4% for the second straight month.

However, the downbeat expectations make an upside surprise more likely so there is a danger that traders might get wrong-footed amid the growing market consensus of a Fed pause after May.

The greenback has been under increasing pressure over the past month and the dollar index just brushed a one-year low, having retreated about 12% from the peaks of last September.

The U.S. currency is looking somewhat vulnerable to upside corrections against major pairs such as the euro, pound and the Australian dollar.

Though, it is not so much against the Japanese yen, which is contending with its own weakness.

However, even if there are some gains in store for the greenback from a positive retail sales print, any rebound is likely to be short-lived given that markets seem convinced about the Fed cutting rates towards the end of the year.

The euro is perhaps the best example of why Fed expectations are weighing so heavily on the dollar.

In quite a turnaround from where things stood at the start of the global tightening cycle, the ECB is now in a position to be the last hawk standing.

Slovenia’s central bank head Bostjan Vasle yesterday suggested that the ECB’s May policy decision will be between a 25- or 50-bps rate hike.

The Australian dollar has been boosted this week from stronger-than-expected employment numbers out of the country, as well as encouraging trade figures from China.

It’s been a tougher period for the yen, however, as the Bank of Japan’s new chief Kazuo Ueda once again downplayed the likelihood of any significant policy tightening despite faster wage growth, as he predicted that inflation would fall back below 2% later this year.

Nevertheless, the Japanese currency was broadly firmer on Friday and the dollar slipped slightly to around 132.30 yen.

Raffi Boyadjian is Lead Investment Analyst. An original version of this article can be found here.