US recap: Dollar mixed as Fed, Middle East, BoJ risks weighed

April 19 – The dollar index was flat on Friday and barely higher on the week as last week’s gains, which came on the Fed’s increasing caution over rate cuts due to stubborn inflation, consolidated amid brief bouts of geopolitical derisking.

Friday’s weakest major currency was sterling, which fell 0.49% on a combination of risk aversion, disappointing UK retail sales, and surprisingly dovish comments from Bank of England Deputy Governor Dave Ramsden on Friday.

Unlike EUR/USD, which rose 0.09%, sterling made new lows for the week and hit its lowest since Nov. 14’s explosive rally. Also unlike EUR/USD, Gilts-Treasury yield spreads resumed their downtrend, with swaps now fully pricing in at least two 25bp BoE rate cuts this year from closer to 40bp before Friday.

Fed rate-cut pricing remains stalled near 40bp for this year.

EUR/USD’s early risk-off drop amid Middle East tensions found support at 1.0611 and just above April’s 1.0601 lows, as Bund-Treasury yield spreads tightened slightly.

The ECB remains modestly favored to cut rates in June, with roughly 70b priced in by year-end.

ECB President Christine Lagarde injected a bit more uncertainty into recent signaling from the central bank regarding rate cuts being likely to commence in June, perhaps as an attempt to support EUR/USD after its 2.6%, 6-day dive from April’s high to its lows.

But ECB policymaker Pierre Wunsch was a shade more dovish, noting the eurozone and US economies had “decoupled” and the gap between the ECB and Fed’s interest rates may widen, which likely aided EUR/USD’s slip away from Friday’s 1.0678 high.

USD/JPY fully recovered from the plunge to 10-day moving average support at 153.59 in Asian trading triggered by Middle East linked safe-haven trading.

Prices remain below Tuesday’s new 34-year high at 154.79 and below the 155 level where BoJ intervention has been expected.

However, comments from the IMF’s Japan mission chief, Nada Choueiri, said the yen’s weakness is a net positive for Japan’s economic growth. She added that BoJ tightening must be gradual and she believed G7 nations — including Japan — were committed to flexible exchange rates.

Whether Japanese policymakers take that guidance remains to be seen. Japanese inflation continues to recede, though most measures have remained above the BoJ’s target for more than two years. The BoJ is not expected to hike at next Friday’s meeting, and probably will not move again until a 10bp hike in July.

That suggests next Friday’s US PCE data and Fed implications will be more important than that day’s BoJ meeting.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)