The U.S. dollar declined on Friday while Euro and Pound soared

The U.S. dollar tumbled on Friday, lowering versus the Sterling. The latter surged forward after volatile trading in the previous session. Britain released a new budget plan for tax rises and spending cuts on Thursday. Despite its losses, the greenback was still set for its largest weekly gain in a month. Federal Reserve officials announced that they plan to continue hiking U.S. interest rates more than forex markets expect currently.

Several officials commented about the Fed’s commitment to raising interest rates, with St Louis Fed President James Bullard being the last. He stated that even with a dovish view, the funds’ rate needs to increase to at least 5-5.25% to hinder soaring inflation, from 3.75-4% currently. Bullard also added that if the agency gets more pessimistic reports, it might even need an above 7% hike. However, forex markets expected U.S. rates to hit approximately 5% in June 2023.  

The dollar remained steady against the Japanese Yen, trading around 140.27. However, its index was flat at 106.75 on Friday. Compared the last week, the dollar index gained almost 0.4% this week, recovering some losses after last week’s 4% plunge. The unexpected U.S. inflation report caused one of the greenback’s steepest weekly drops in decades.

Furthermore, stronger-than-expected U.S. retail sales data earlier this week prompted speculation about a pause in rate hikes. According to this report, consumers continued spending, which indicated economic strength. On Friday, treasury yields soared after Bullard’s comments. But they are still lower compared to the week’s highs. 10-year yields were trading around 3.82%.

Meanwhile, new Japanese data showed consumer prices are rising at their fastest pace in 40 years. It might force the government’s hand to change its super-easy monetary policies. However, the yen showed little reaction to the news.

How is the Euro trading? 

The common currency climbed up by 0.1% against the dollar. It exchanged hands at $1.0356 at last. The Sterling also added 0.3%, trading at $1.1908 on Friday. Both currencies have skyrocketed to multi-month highs against the greenback after consumer inflation data showed that U.S. price pressures were weakening.

ING strategist Francesco Pesole noted that this consolidation phase in the U.S. dollar might continue for a bit longer. Forex markets will likely remain very sensitive to Fed speakers. Moreover, post-CPI comments have hinted at some lingering caution regarding inflation. Fed members tried to ensure markets that a dovish pivot wasn’t coming soon. As a result, the future market has fully priced hiking rates to a 5.00% in the first half of 2023.  

In Europe, new data showed on Friday that British retail sales only partially recovered in October. In the U.K., Inflation skyrocketed to a 41-year peak of 11.1% last month.

The Australian dollar rallied by 0.3% to $0.6708 today, trading near its highest point for two months. Moreover, the New Zealand dollar jumped by 0.6% to $0.6168. The Kiwi headed for its fifth consecutive weekly gain ahead of next week’s central bank meeting.

What about the EM currencies? 

Emerging market currencies weakened on Friday. They seemed set to snap a three-week winning run. However, EM shares remained steady during the session. Even though MSCI’s index for emerging market stocks was flat, it was still set to gain for this week. Overall, the index climbed by approximately 0.7% for the week.

Today’s trading session was mixed. Taiwan, China, and central Europe experienced some losses, while South African and Turkish assets surged forward. The Chinese yuan gained 0.4% even as coronavirus cases increased in the country. The government further relaxed its Covid-19 restrictions. It removed limits on the numbers allowed at theatres, as well as events such as music festivals and concerts in low-risk areas without fresh outbreaks.

Analysts think that Chine likely won’t show a straight-line market recovery. The coronavirus risk causing turbulence in the markets remains, as well. Moreover, China’s central bank recently announced new measures to make its market attractive for foreign investors and traders.

On Friday, MSCI’s index of EM currencies seemed set to plunge by about 0.5% for the week. However, South Africa’s rand jumped against the U.S. dollar. In addition, most central European currencies gained versus the euro.

Traders are waiting for S&P Global and Moody’s sovereign credit rating reviews in South Africa. It is due later today. The South African Reserve Bank’s interest rate decision is also coming soon.