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Dollar rolls to new highs

German business optimism dims, UK inflation cools to a still hot 8.7%, and the Loonie falls to 1-week low.

Global overview

Caution reigned and so did the U.S. dollar as it marched to new two-month peaks. The mostly stronger greenback climbed to one-week highs versus Canada while it was at or near one- and two-month peaks against the UK pound and euro, respectively. Safety flows continue to pour into the dollar given the uncertain fate of U.S. debt ceiling talks. Meanwhile, worrisome data from Europe added to fears about slowing global growth amid high and still rising interest rates. Mixed news on UK inflation resulted in a weaker pound with headline consumer prices cooling to a still hot 8.7% annual rate in April. The euro’s decline gathered pace after German business confidence fell for the first time in seven months. Down Under, the New Zealand dollar plunged about 2% after the country’s central bank raised interest rates to 5.50%, a 14-year high, from 5.25%, but signaled an earlier than expected pause. The greenback continues to enjoy twin tailwinds from safety flows and from persistent signs of a resilient U.S. economy. The Fed later today issues the minutes from its previous meeting when it raised rates for a 10th straight time to 5.1%, the highest in 16 years. Minutes that suggest a still opened door for further rate increases would tend to buoy the dollar.

German business optimism dims

More signs of economic moderation in Europe weighed anew on the euro, pushing it to 8-week lows against the U.S. dollar. Germany’s influential Ifo survey of business confidence fell for the first time in seven months in May when it retreated more than expected to 91.7, compared to forecasts of 93 from a downgraded 93.4 in April. The blow to confidence this month came from inflation making a slow descent which is keeping pressure on the bloc’s central bank, the ECB, to raise interest rates from 3.25%, the highest level in almost 15 years.    

Chart: Euro in line with swap rates? EUR/USD and the rate differential between the Eurozone and US.

UK inflation cools to a still hot 8.7%

Sterling fell to new one-month lows against the greenback as the dust settled following Britain’s latest monthly snapshot of inflation. On the bright side, headline inflation cooled below 10% for the first time in eight months by printing at an annual pace of 8.7% in April. But that topped forecasts of 8.2%, while the core reading unexpectedly accelerated to 6.8%, the highest in over three decades, from 6.2%. The still hot reading of inflation cements expectations for the Bank of England to raise rates from 4.50% in June which on the surface is positive for the pound’s yield allure but can intensify the headwinds on the economy that ultimately is not good for sterling.

Chart: Surging core inflation will concern BoE. UK consumer price inflation.

Loonie falls to 1-week low

Canada’s dollar slumped to fresh one-week lows against the U.S. dollar, a reflection of market angst over Washington’s inability so far to raise America’s borrowing limit or risk a market-rattling default. Higher oil is helping to slow the loonie’s decline but the fact that oil remains down about 9% this year after ending 2022 above $80 has limited scope for C$ appreciation. A light week for Canadian economic indicators has led the loonie to take its cues from broader risk sentiment and the direction of the greenback which climbed to new two-month highs against a basket of major currencies. The next big reading on Canada’s economy arrives with first quarter growth on May 31.

Chart: C$ struggles to strengthen with oil down about 9% YTD. Crude oil (WTI).

Dollar hovers near peaks

Table: rolling 7-day currency trends and trading ranges

Table: Rolling 7-day currency trends and trading ranges.

Key global risk events

Calendar: May 22-26

Table: Key global risk events calendar.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.

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