The US Dollar strengthened broadly against major currencies on Friday, driven by a combination of geopolitical developments, robust US economic data, and shifting expectations for Federal Reserve policy. The EUR/USD pair extended its losing streak for a fifth consecutive day, trading around 1.1650 during Asian hours, as risk aversion increased and the Greenback advanced amid surging inflation linked to ongoing Middle East tensions. This environment has reinforced market expectations that the Federal Reserve will maintain high interest rates for an extended period or potentially implement further hikes [1].
US Retail Sales rose 0.5% month-over-month in April, matching estimates but falling short of March's 1.6% increase. Year-over-year, sales climbed 4.9%, surpassing the 3.3% forecast, highlighting the resilience of American consumer spending despite elevated borrowing costs [1]. Meanwhile, the USD/CAD pair climbed to around 1.3755, poised for its largest weekly gain in over two months. Rising energy prices have stoked inflationary pressures, further boosting expectations of a Fed rate hike this year. Markets are now pricing in a 36.9% chance of a 25 basis point hike at the December meeting, up from 22.5% a week ago, according to the CME FedWatch tool [2].
A key catalyst for the US Dollar's strength was the high-profile summit between US President Donald Trump and Chinese President Xi Jinping in Beijing. Trump announced that he had struck “fantastic trade deals” with Xi and claimed, "We’ve settled a lot of different problems that other people wouldn’t have been able to solve." The summit also addressed efforts to reopen the Strait of Hormuz, which Iran has kept closed since late February, impacting global energy markets [2][3]. A White House official stated that the two sides discussed expanding market access for American businesses in China and increasing Chinese investment [3].
The USD/JPY pair also extended its winning streak for the fifth day, trading 0.11% higher near 158.60. The US Dollar Index (DXY) rose 0.25% to near 99.10, its highest in over two weeks. Technical analysis indicates that USD/JPY remains in a bullish trend, though the Relative Strength Index at 77 suggests overbought conditions [3].
On the policy front, the resignation of Stephen Miran from the Fed Board of Governors has paved the way for Kevin Warsh to take over as Fed Chair, further contributing to shifts in market sentiment [1]. In Europe, money markets are widely pricing in a European Central Bank (ECB) rate hike in June, with three increases nearly fully priced in by the end of 2026. ECB official Martins Kazaks stated that the central bank will need to raise borrowing costs if rising crude prices feed into inflation expectations [1]. In Canada, the Bank of Canada signaled patience, with Governor Tiff Macklem indicating that future policy adjustments will likely be small and not predetermined [2].
CONCLUSION
The US Dollar's rally was fueled by positive developments from the Trump-Xi summit, robust US economic data, and heightened expectations for prolonged Fed policy tightening. Rising global inflation and energy prices have reinforced the Greenback's safe-haven appeal, while central banks in Europe and Canada signal divergent policy paths. Markets remain focused on geopolitical risks and upcoming central bank decisions, with the US Dollar likely to retain its strength in the near term.