The US Dollar (USD) extended its rally on Friday, reaching multi-month highs against major currencies as expectations for a more hawkish Federal Reserve (Fed) intensified following a series of robust US economic data releases. The Euro (EUR) fell to near one-month lows against the USD, with EUR/USD trading around 1.1626 and poised to close the week in negative territory [1]. The Australian Dollar (AUD) also experienced a sharp decline, with AUD/USD down 0.91% on the day to 0.7155, marking its lowest level in over a week [3]. Meanwhile, the Canadian Dollar (CAD) weakened despite elevated Oil prices, with USD/CAD trading near 1.3760 [2].
US inflation data was a key driver, as the Consumer Price Index (CPI) accelerated to 3.8% year-over-year in April, up from 3.3% previously [2][3]. The Producer Price Index (PPI) surged 1.4% month-over-month, the strongest monthly increase in four years [2], and 6% year-over-year [3]. Retail Sales rose 0.5% month-over-month, and Industrial Production expanded by 0.7% in April, exceeding expectations [3]. This string of strong data reinforced market expectations that the Fed may keep interest rates elevated for longer, with the CME FedWatch Tool indicating nearly a 50-50 chance of a rate hike at the December meeting [1] and a 40% chance of at least one hike before year-end, up from less than 15% a week ago [3].
The US Dollar Index (DXY) climbed above the 99.00 mark, reaching its highest level since April 8 [1], and was described by ING analysts as having “serious short-term momentum” [3]. The benchmark 10-year US Treasury yield advanced to a one-year high [1][3], further supporting the Greenback. Technical analysis of USD/CAD showed the pair trading at 1.3756 with a bullish near-term bias, as the Relative Strength Index (RSI) hovered in overbought territory near 78 [2].
Geopolitical tensions, particularly the deadlock in US-Iran negotiations and the ongoing blockade of the Strait of Hormuz, continued to fuel risk aversion and support demand for safe-haven assets like the US Dollar [1][2][3]. Elevated energy prices, linked to supply disruptions in the Middle East, contributed to deteriorating inflation outlooks in both the US and Eurozone [1]. Despite the European Central Bank (ECB) being expected to raise rates at least twice this year, including a fully priced-in hike at the June meeting [1], the Euro remained under pressure due to the region’s vulnerability to rising energy costs.
Forward-looking commentary from ING suggested that the DXY could move toward the psychological 100.00 level unless geopolitical conditions improve [3]. While the Reserve Bank of Australia (RBA) maintained a hawkish stance, it was insufficient to counteract the USD’s strength, though it may help limit further downside for the AUD [3]. Canadian economic data showed mixed signals, with housing indicators beating expectations at 279.3K versus 240K expected, but manufacturing sales rising only 3% month-over-month, below the 3.5% forecast [2].
CONCLUSION
Stronger-than-expected US inflation and economic data have driven a sharp repricing of Fed rate hike expectations, propelling the US Dollar to multi-month highs and pressuring major counterparts like the Euro, Canadian Dollar, and Australian Dollar. Elevated Treasury yields and persistent geopolitical risks are further supporting the Greenback’s rally. Markets are now closely watching for further Fed signals and geopolitical developments that could influence the USD’s trajectory.