US dollar rallies on safe-haven bids, rate cut delay; yen hits 34-year low

The U.S. dollar rose to its highest since November on Friday, boosted by safe-haven demand amid geopolitical tension in the Middle East as well as increasing divergence in monetary policy between the Federal Reserve and other major central banks. The dollar index was on track to post its largest weekly percentage gain since September 2022. It was last up 0.7% at 106.02.

Israel on Friday awaited an attack by Iran or its proxies, as warnings grew of retaliation for the killing last week of a senior officer in Iran’s embassy in Damascus. Iran’s supreme leader, Ayatollah Ali Khamenei, accused Israel of the killing and said it “must be punished and shall be” for an operation he said was equivalent to an attack on Iranian soil.

“We have a confluence of things happening that are boosting the dollar: geopolitical risk increasing, hawkish data out of the U.S. in terms of inflation and last week’s strong employment report,” said Brad Bechtel, global head of FX at Jefferies in New York.

“Geopolitical risk, in particular, is increasing volatility in the marketplace,” he added.

The euro, meanwhile, tumbled to a five-month low against the dollar, after the European Central Bank indicated it could soon cut interest rates. The expectation for the Fed, on the other hand, is that it will keep rates higher until later in the year.

Europe’s single currency last traded at $1.0637, down 0.9%, after hitting $1.0622, its weakest since Nov. 3 and was on pace for its biggest weekly percentage drop since late September 2022.

The broad strength in the dollar also sent the yen to a fresh 34-year low as investors remained on the lookout for signs of potential action from Japanese monetary authorities to prop up the currency.

Recent U.S. economic data on the labor market and inflation have caused market expectations for a rate cut from the Fed to be dialed back yet again.

Expectations for a cut of at least 25 basis points in June have shrunk to 26%, down from 50.8%% a week ago, according to CME’s FedWatch Tool. U.S. rate futures have now priced in a 77% chance of the first rate cut taking place in September.

Fed fund futures have also pared back the number of rate cuts of 25-bps cuts this year to fewer than two, or roughly 46 bps, from about three or four a few weeks ago.

That puts the Fed in contrast to the European Central Bank, which on Thursday signaled it could begin cutting rates as soon as June.

The difference in interest rate expectations has widened the gap between U.S. bond and German euro zone yields, hitting its highest since 2019. That has made U.S. bonds more attractive and boosted the dollar.

Economic data on Friday showed U.S. import prices increased for a third straight month in March amid rises in the costs of energy products and food, but underlying imported inflation pressures were tame.

A separate survey from the University of Michigan showed its preliminary reading of U.S. consumer sentiment softened in April while inflation expectations for the next 12 months and beyond increased.

Sterling also weakened against the dollar and was last down 0.9% at $1.2445 after falling to $1.2426, its lowest since Nov. 17. The pound was set for its largest weekly percentage drop since mid-July.

The yen rebounded after the dollar strengthened against the Japanese currency. The dollar rose to its highest since mid-1990 at 153.39 yen and it last changed hands at 153.19 yen, down 0.1%.

The threat of currency intervention by Japanese officials appeared to have dampened the moves in the yen, after Finance Minister Shunichi Suzuki said: “If there are excessive moves, we will respond appropriately without ruling out any options.”

The Japanese currency was on track for a weekly fall of about 0.8%, its second straight week of declines against the dollar.

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