Key points:

Dollar heads for its largest weekly rise in over a month.
U.S. business activity hits a two-year high, influencing interest rate expectations.

The dollar surged this week, marking its largest weekly rise in over a month. Surprisingly strong U.S. economic data has left markets on edge about the outlook for U.S. inflation and interest rates.

In May, U.S. business activity accelerated to its highest level in just over two years. Manufacturers reported surging input prices, causing a pullback in U.S. interest rate cut expectations and a rise in government bond yields.

This development has driven the dollar up almost 1% against the Japanese yen, reaching 157.11 yen. Despite Japanese government bond yields climbing to decade highs, clearing 1% at the ten-year tenor, the yen has remained relatively unaffected.

Japan’s core inflation slows

Japan’s core inflation slowed for a second consecutive month in April, meeting market expectations at 2.2%. However, this has had minimal impact on the yen.

Policymakers’ cautious rhetoric on inflation and the distant or minimal rate cuts have added to traders’ nervousness.

Australian Dollar dips below key level, New Zealand Dollar remains resilient

The Australian dollar faded to $0.6592 on Friday, failing to hold a key $0.6650 chart level. This left it down 1.4% for the week and well below the recent four-month high of $0.6714.

The New Zealand dollar has been supported by a hawkish outlook from the Reserve Bank of New Zealand but remains 0.6% weaker for the week at $0.6098.

Euro edges up from nine-month low

The euro saw a modest rise from a nine-month low against the pound on Thursday after a key European wage indicator picked up. However, the moves were modest as the European Central Bank highlighted one-off factors contributing to the wage rise.

Negotiated wages have grown a lot, but the most recent data is dominated by one-off payments. The ECB wage tracker – for wage trends across the euro area – shows that after growth, wage pressures are moderating. #TheECBBlog takes a look at this tool https://t.co/fKRzyA16pZ pic.twitter.com/5M84oL28Lx
— European Central Bank (@ecb) May 23, 2024

Rates markets still price a near 90% chance the ECB will cut rates next month. The euro traded at $1.0809 in Asia, down 0.5% for the week.

Dollar index posts largest weekly gain

Chart displaying the US Dollar Index (USDX) at 104.923 with a trend of -0.04%, reflecting a rise in the dollar as traders scale back US rate cut expectations. The chart features moving averages (MA) and MACD indicators, highlighting the impact of U.S. business activity accelerating to its highest level in over two years and surging input prices reported by manufacturers. This has led to a pullback in US interest rate cut expectations and a rise in government bond yields. Image hosted by VT Markets, a forex CFDs brokerage

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The U.S. dollar index, which measures the dollar against a basket of six major peers, was up nearly 0.6% for the week at 105.1, on course for its largest one-week rise since mid-April.

Traders will keep an eye on final German GDP figures, British and Canadian retail sales, U.S. durable goods orders, and speeches from ECB and Federal Reserve policymakers, particularly Fed Governor Christopher Waller on longer-term rates.

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