US Dollar Rises on Inflation and Fed Rate Hike Speculation as Consumer Spending Surges


The US dollar has surged in response to a rise in PCE inflation, with the odds of a June Fed hike now exceeding 50%.

The USD/JPY has led the rally, reaching a session high of 140.31 and setting a new high for the year, before settling back to around 140.00.

Market speculations on Fed hike 

Moving forward, the market will need to consider whether the Fed will pause or resume hiking interest rates to 6% or higher.

Gas Prices Won't Curb Inflation

Although there is some relief with US gasoline prices currently 23% lower than last year, this is unlikely to have a significant impact on controlling inflation given the strong consumer and job market conditions.

Consumer Spending Surges

The US Commerce Department announced on Friday that consumer spending in the US had increased by more than expected in April, jumping 0.8% last month. 

This news boosted the economy's growth prospects for the second quarter. Economists polled by Reuters had expected consumer spending, which accounts for more than two-thirds of US economic activity, to rise 0.4%.

In addition, the personal consumption expenditures (PCE) price index rose 0.4% in April, following a 0.1% increase in March. Over the 12 months through April, the PCE price index saw a YoY increase of 4.4%, compared to 4.2% in March.

Dollar Soars to Six-Month High Amidst Market Uncertainty

Following the data release, the dollar recorded a new six-month high against the yen, settling at 140.255. However, markets remained on edge for any default risks ahead of a long weekend for US banks. 


Thursday's apparent progress in talks between President Joe Biden and ranking Republican congressman Kevin McCarthy helped ease tensions.

Wall Street traders became increasingly wary of US government debt securities, but the prospect of an imminent deal helped lift sentiment across markets on Friday and support more risk-sensitive currencies at the expense of the dollar. 

The US dollar index, which measures the currency against six major peers, is down 0.096% today at 104.130, off Thursday's two-month high of 104.31.

The dollar's recent momentum has also been driven by growing expectations that the Federal Reserve will haveto keep interest rates higher for longer to combat inflation. 

Data released on Thursday showed that the number of Americans filing new applications for unemployment benefits rose moderately last week to 229,000, which was less than expected. 

Currency analysts noted that recent moves in currencies have been largely driven by the sharp repricing of FOMC policy.

European Policymakers Divided on Inflation Outlook

Top European policymakers have varying views on the future path of inflation in the eurozone. European Central Bank chief economist Philip Lane took issue with concerns about core inflation, while others expressed cautious optimism. 

The euro was last up 0.07% against the dollar at $1.07320, but it was not far from a two-month low of $1.0708 it hit in the previous session.

The pound rose 0.3% to $1.23570 after data showed that British consumers opted to spend in April, although the currency was still heading for a weekly loss. 

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