By Chuck Mikolajczak
NEW YORK (Reuters) -The euro stumbled to a five-month low against the dollar on Friday after the European Central Bank indicated it could soon cut rates, a divergence from market expectations for the U.S. Federal Reserve to keep rates higher until later in the year.
The broad strength in the dollar also sent the Japanese yen to a 34-year low as investors looked for signs of a possible intervention from central bank officials.
Recent U.S. economic data on the labor market and inflation have caused market expectations for a rate cut from the Federal Reserve to be dialed back yet again.
Expectations for a cut of at least 25 basis points (bps) in June have shrunk to 24.9%, down from 53.2% a week ago, according to CME’s FedWatch Tool, while expectations for a cut in July have fallen to 52.8% from 72.5% in the prior week.
That puts the Fed in contrast to the European Central Bank (ECB) which on Thursday signaled it could begin cutting rates as soon as June.
“It’s so obvious what’s going on, we’ve got a dollar U.S. interest rate strength play, that’s what’s going on here, said Joseph Trevisani, senior analyst at FX Street in New York.
“You’ve got the Fed banking on its scenario, neither side of which is coming true. Inflation’s supposed to come off, well, it’s not, and the economy’s supposed to weaken, which it’s not, so neither side is coming true so frankly, they have zero ground to cut rates.”
The difference in interest rate expectations has widened the gap between U.S. bond yields and German euro zone benchmark yields to the highest since 2019, making U.S. bonds more attractive and boosting the dollar.
The dollar index gained 0.75% at 106.06, after reaching 106.09, its highest since November 3. The greenback was up more than 1.7% for the week, eyeing its biggest weekly percentage gain since last September 2022.
Economic data on Friday showed U.S. import prices increased for a third straight month in March amid rises in the costs of energy products and food, but underlying imported inflation pressures were tame.
A separate survey from the University of Michigan showed its preliminary reading of U.S. consumer sentiment softened in April while inflation expectations for the next 12 months and beyond increased.
The euro was down 0.91% at $1.0626 after hitting $1.0621, its weakest since November 3 and was on pace for its biggest weekly percentage drop since late September 2022.
Sterling also weakened against the dollar and was last down 0.92% at $1.244 after falling to $1.2426, its lowest since November 17 and was poised for its biggest weekly percentage drop since mid-July.
But the yen rebounded after the dollar strengthened against the Japanese currency, rising to its highest since mid-1990 at 153.38 yen. Against the Japanese yen, the dollar last weakened 0.28% at 152.85.
The possibility of currency intervention by Japanese officials appeared to keep help dampen the moves in the yen compared with other currencies on Friday, after Finance Minister Shunichi Suzuki said: “If there are excessive moves, we will respond appropriately without ruling out any options.”
The Japanese currency was on track for a weekly decline of of about 0.8%, its second consecutive week of declines against the dollar.
(Reporting by Chuck Mikolajczak; additional reporting by Harry Robertson in London, Editing by Angus MacSwan)
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