US dollar recovers as markets in consolidation mode; pares gains after data

THE US dollar rose against a broad range of currencies on Friday (Feb 22), partly retracing losses versus the yen as investors consolidated positions ahead of the weekend, looked to more inflation data next week, and kept an eye on tariff headlines.

“It’s a bit of consolidation ahead of the weekend. The moves lack conviction and this is still position-squaring,” said Marc Chandler, chief market strategist, at Bannockburn Global Forex in New York. “To me, the dollar peaked the week before the Trump inauguration. This is just a continuation of that correction.”

The greenback, however pared gains after S&P Global data on Friday showing US business activity dropped to a 17-month low this month. It fell further after declines seen in the University of Michigan sentiment report and US existing home sales data.

The reports kept the prospect of interest rate cuts by the Federal Reserve intact this year, even though it will remain on hold for the next several months.

US rate futures have priced in 44 basis points (bps) of easing this year, compared with 38 bps on Thursday, according to LSEG calculations. The Fed could likely resume cutting interest rates again either at the September or October policy meeting, LSEG data showed.

Markets will look to the release of the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure, next Friday.

In late morning trading, the dollar was last flat on the day against the yen at 149.58 yen. It has fallen in five of the last six weeks, and was down 1.8 per cent on the week.

The yen rallied beyond the 150-per-dollar mark, as a sell-off in Japanese government bonds drove yields to 2009 highs after national core inflation hit a 19-month peak in January, fuelling expectations for more interest rate rises in Japan.

Bank of Japan (BOJ) chief Kazuo Ueda quickly doused the momentum, saying the central bank could contain long-term interest rates by buying government bonds.

The yen has gained about 3.2 per cent so far in February. Another quarter-basis point rate hike is not fully priced in until September, although interest rate markets have factored in a slight chance of a hike as soon as May.

In the United States, data showing the S&P Global’s flash US Composite PMI Output Index falling to 50.4 this month, the lowest since September 2023, compared with 52.7 in January, pulled the dollar lower against the yen. The PMI index tracks both the manufacturing and services sectors.

Also weighing on the dollar was the more-than-expected drop in the US consumer sentiment index to a 15-month low. At the same time, inflation expectations surged as households worried about President Donald Trump’s steep and broad-based tariffs and their impact on their purchasing power.

Existing home sales also came in softer than expected, down 4.9 per cent last month.

Euro, German elections

The euro, meanwhile, stumbled after a series of business activity surveys showed a sharp contraction in early February in France and only mild improvement in Germany – the euro zone’s traditional twin engines of growth.

It was last down 0.4 per cent at US$1.0455, on track for its largest daily fall since early February.

Investors are also looking at Sunday’s election in Germany, where polls point to a conservative coalition win that could be pivotal in shaping their expectations for future economic growth.

Aside from Friday’s leg-up against the yen, the dollar has been struggling for traction in the past few weeks. The index has fallen 1.8 per cent in February, heading for its biggest monthly slide since September. The dollar index was last up 0.3 per cent at 106.68.

Trump’s threats of tariffs have not yet materialised, fourth-quarter earnings have been robust so far and the macro data shows a US economy that is motoring along, all of which has stirred up little trader appetite to load up on fresh dollar holdings.

“I don’t think Trump was ever going to have broad-based 25 per cent charge on everything…but at the same time, there is the possibility, particularly if you’re in Europe, that more tariffs are coming,” Rabobank strategist Jane Foley said.

Trump this week unveiled plans for tariffs on lumber imports, but also said a new trade deal with China was possible.

The pound, meanwhile, fell 0.3 per cent to US$1.2633 due to overall dollar strength. It did gain earlier after data showing UK retail sales rose more than expected in January. A separate survey showed UK business activity expanded in February, although employers made deep cuts to staffing levels. REUTERS