The dollar made progress on Friday, ending a strong week on a high after stronger than expected inflation data reinforced prospects for a rate rise this year by the US Federal Reserve.
Core inflation in the US, which strips out volatile energy and food prices, rose to an annual 1.8 per cent in April, from 1.7 per cent in March, prompting a rise in Treasury yields as prices fell, while the dollar erased earlier losses to climb 0.9 per cent, as measured against a basket of its chief rivals.
Over the week, the dollar index was up 3.2 per cent at 96.1.
Although minutes, published on Wednesday, from the Fed’s meeting earlier this month effectively ruled out a June rate rise, market action suggested at least one quarter point move from the central bank was likely at some point this year.
“Although not too much should be made of the last couple of months of stronger consumer price data, this will only add to pressures for a September tightening,” said Alan Ruskin at Deutsche Bank.
Following an early bounce on Friday, the euro resumed the downward path taken earlier in the week after the European Central Bank announced plans to bring forward some of its bond purchases.
Last Friday, amid rising hopes for the eurozone economy and growing doubts over a summer US rate increase, the shared currency hit a 16-week high.
This week, however, the euro fell after the ECB said it would front-load some of its stimulus-led bond purchases in May and June to offset expected liquidity shortages later in the summer.
Benoît Cœuré on the ECB’s executive board expressed these concerns on Monday night, saying recent falls in bond prices were the result of “global capital markets showing signs of reduced liquidity”.
His comments were tempered somewhat by minutes, published on Thursday, from the last governing council meeting, which said scarcity concerns about the supply of government bonds were exaggerated.
Greece, meanwhile, was never far from investors’ minds this week as European leaders and finance ministers were unable to agree new measures for the country without the backing of the IMF.
“As long as there is no long-term credible solution, as opposed to a fudge just designed to bring Greece through the summer, the ECB may abandon any talk of tapering its QE operations early,” said Hans Redeker at Morgan Stanley. “We would sell the euro rally, arguing that the April/May upward correction had topped out at $1.1460 last Friday.”
The single currency was down 3.8 per cent against the dollar over the week, at $1.1016 and lost 2.3 per cent versus sterling to £0.7111.
The pound’s losses against the dollar were limited to 1.6 per cent over the week to $1.5505.