As traders adjust views on Fed rate hikes, the dollar slips for the second week in a row

Dollar edged lower on Friday as traders pared expectations for interest rate hikes from the Federal Reserve and improved inflation and consumer spending data eased recession fears.

On a weekly basis, the dollar index fell 1.24%, following a 1.45% decline last week. Its low was 101.43, its weakest mark since April 25. At 3:10 p.m. Eastern time (1910 GMT), the dollar was down 0.059% at 101.66, its lowest point since April 25.

“We still believe that the USD’s best days are behind it, and while it may not fall greatly yet, further gains are unlikely,” Scotiabank strategists wrote in a client note.

In the event that the economy slows more than expected, the Fed may adjust expectations for rate hikes later this year. The greenback hit a near two-decade peak above 105 earlier this month but has declined along with expectations for the magnitude of likely Fed rate hikes this year, fueled by fears over runaway inflation.

According to Joe Manimbo, senior market analyst at Western Union Business Solutions, “The dollar is losing ground as the Fed takes a pause on rate hikes in the fall.” Participants at the Fed’s May meeting this week said they expected 50 basis-point increases at the June and July policy meetings, but many believed big, early hikes would give them enough time to assess whether tighter policy is taming inflation later this year.

Inflation rose in April, but at a slower rate than in recent months, according to data released on Friday. After shooting up 0.9% in March, the personal consumption expenditures (PCE) price index rose 0.2%, its smallest gain since November 2020. A year ago, the PCE price index jumped 6.6% after rising 6.3% in April.

Benchmark U.S. Treasury yields declined on Friday, but briefly rebounded off session lows after April inflation figures boosted expectations that the worst of soaring prices pressures is over.

The U.S. consumer spending last month rose more than expected as households increased their purchases. “The jobs data will shed some light on the scope for tightening from the third quarter forward,” Manimbo said. “Next week’s key U.S. report will be the nonfarm payrolls numbers for May.”

It has been the euro that has benefited most from the dollar’s decline, but investors believe that much of the expected rate hikes from the European Central Bank already have been priced into the currency. After rising to its highest level in a month earlier, the single currency was flat at $1.0731 for the day. Sterling rose 0.16% to $1.2628. The Australian dollar gained 0.8% to $0.7156, while the New Zealand dollar gained 0.8% to $0.6535.

Bitcoin fell 2.59% to $28,426, continuing its downward trend from the psychologically important $30,000 level this week despite a better risk sentiment.