Fed Hike Bets Lift Dollar Despite Falling Oil Prices And Ebbing Inflation Fears

(RTTNews) - The U.S. Dollar extended gains during the week ended June 26 as strong rate hike bets from the Federal Reserve boosted the greenback. Declining crude oil prices as well as the lack of negative surprises in the PCE-based inflation readings, however limited the dollar's surge.

During the week, the U.S. dollar inter alia rallied against the euro, the British pound, the Australian dollar, the Japanese yen, the Swedish krona, the Canadian dollar and the Swiss franc. The 6-currency Dollar Index jumped around half a percent over the course of the week. Here is a quick recap of the dollar's trajectory during the week ended June 26.

During the week, the Dollar Index (DXY), a measure of the Dollar's strength against a basket of 6 currencies climbed from the low of 100.76 recorded on Monday to the high of 101.80 recorded on Wednesday.

PCE-based inflation readings for May released by the U.S. Bureau of Economic Analysis on Thursday morning showed annual PCE price index increasing at 4.1 percent, in line with expectations. The core component thereof also increased inline, at 3.4 percent. The month-on-month PCE price index remained steady at 0.4 percent, defying fears of a spike to 0.5 percent. The core component thereof also remained steady at 0.3 percent, aligning with market forecasts.

Though the update to the Fed's preferred inflation gauge mellowed the dollar's resurgence, fears of a rate hike by the Fed continued to remain strong. The CME Fedwatch tool which showed the likelihood of a quarter percent Fed rate hike in July at 36 percent on Monday revealed a 30-percent probability for the same Fed action on Friday.

Despite the de-escalation in Middle East tensions as well as the decline in crude oil prices, the Dollar Index which had closed at 100.85 on June 19, finished trading at 101.36 a week later. The index added 0.51 percent during the week ended June 26.

As Fed rate hike fears boosted the greenback and declining inflation expectations dragged down the euro, the EUR/USD pair plunged 0.74 percent in a week. An update on Friday showed Eurozone median inflation expectations for the next 12 months declining to 3.5 percent in May, the lowest level in three months, down from 4.0 percent in each of the previous two months. During the week ended June 26, the EUR/USD pair dropped to 1.1384, from 1.1469 a week earlier. The pair ranged between a weekly high of 1.1475 recorded on Monday and a weekly low of 1.1325, recorded on Wednesday.

The week ended June 26 also witnessed the pound dropping 0.23 percent against the dollar. The sterling, which had closed at $1.3234 on June 19 declined to $1.3203 by June 26, pressured by political uncertainty, fiscal concerns as well as easing bets of rate hikes by the Bank of England. The GBP/USD pair traded between a high of 1.3274 touched on Monday and a low of 1.3139, recorded on Wednesday.

Swayed by the Dollar's resurgence as well as easing expectations of additional tightening by the Reserve Bank of Australia, the Aussie plummeted against the U.S. Dollar during the week ended June 26. The slippage for the AUD/USD pair during the week was more than 1.6 percent, from 0.7013 on June 19 to 0.6899 on June 26. The pair traded between the week's high of 0.7021 recorded on Monday and the week's low of 0.6875 recorded on Friday.

The Japanese yen also declined 0.28 percent against the U.S. dollar during the week ended June 26, trading near 40-year lows, amidst growing divergence between the interest rates in the U.S. and Japan. The USD/JPY pair which had closed at 161.31 on June 19, rose to 161.76 in a week's time. During the week, the pair ranged between 161.07 touched on Monday and 161.95 recorded on Thursday even as intervention warnings from the government failed to stem the yen's slide.

Sentiment in the currency market remains volatile as U.S.- Iran tensions, a hawkish Federal Reserve, strong economic data from the U.S. as well as slow progress in restoration of shipping through the Strait of Hormuz weigh on sentiment.

The six-currency Dollar Index ranged between 101.15 and 101.39 on Monday and is currently trading 0.11 percent lower at 101.25. The index had closed at 101.36 on Friday.

Market spotlight on the euro comes amidst the ECB Forum on Central Banking commencing on Monday at Sintra, Portugal to deliberate on the theme of "Shaping Europe's future: innovation, growth and stability". Amidst the dollar's weakness, the EUR/USD pair has rallied 0.20 percent to 1.1407 on Monday from 1.1384 at close on Friday.

The GBP/USD pair has also strengthened 0.29 percent to 1.3241 from 1.3203 at the end of the previous week. The pound has been boosted by the dollar's retreat as well as Andy Burnham, the potential successor to Keir Starmer pledging fiscal discipline.

The AUD/USD pair which was at 0.6899 at close on Friday has edged down 0.09 percent to 0.6893 as markets wait for the minutes of Reserve Bank of Australia's meeting.

The USD/JPY pair has also gained 0.11 percent, rising to 161.94 from 161.76 at close on Friday while markets await the release of Bank of Japan's Tankan survey for the second quarter.