The US dollar is slightly higher today. The currency is the strongest against the Japanese yen and the Australian dollar. Yesterday, the dollar strengthened particularly during US trading hours. Thanks to a recent surge in crude oil prices, inflation expectations are accelerating and this is raising expectations for tighter monetary policy in the near future.
Last year, accelerating inflation expectations in the fourth quarter had a limited impact on the dollar. While the dollar traditionally strengthens when both growth and inflation are high (as these conditions are ideal for the Federal Reserve to raise interest rates), the currency weakened instead. One reason for the dollar's weakness last year was strong ex-US growth. As we described in our recent commentary on the US dollar, the currency tends to depreciate when global growth is accelerating. Now that ex-US growth is slowing (particularly in Europe and Asia), the outlook for the dollar is improving. While the currency has failed to react to rising inflation in the past, this may not be the case today. Of particular note is the dollar's recent strength against both the yen and the Swiss franc (both offer negative interest rates and are the least likely to raise interest rates in the near future). Our short-term outlook on the dollar is neutral, while our medium-term outlook remains bearish.
USD/JPY is up today and currently trading above 107.60. EUR/USD is flat and trading above 1.2330. The pound is down slightly, and GBP/USD is currently above 1.4050.
Looking at US economic events this week, the most important data release is YoY March retail sales. MoM March retail sales (0.4%) met expectations. FOMC members Bostic and Kashkari noted that wages remain weak. March build permits (1.35m vs. 1.32m expected) and housing starts (1.32m vs. 1.26m expected) were better than expected. MoM March industrial production (0.5% vs. 0.4% expected) and March capacity utilization (78% vs. 77.9% expected) were also better than expected. FOMC member Williams expected inflation to remain at or above the Fed's targets for several years. The Fed's Evans said that the institution can raise rates gradually. The Fed’s Beige Book suggested that growth is continuing at a moderate pace, while businesses have raised tariffs as a significant concern. New York Fed President Dudley said that three to four rate hikes this year remains likely. The Fed's Quarles said that the flattening yield curve is not a sign of a recession. Initial jobless claims (232k vs. 230k) were slightly worse than expectations. The Fed's Brainard said that asset valuations and business leverage were elevated. The Fed's Quarles did not comment on monetary policy in his speech on April 19. FOMC member Mester called for further rate hikes this year and next year. Later today, we'll hear from FOMC member Williams. Last week, the consumer price index for March met expectations.