Mar 22 2024: The U.S. dollar experienced a sharp rise in European trade on Friday, following the surprise interest rate cut by the Swiss National Bank, which positioned the Federal Reserve in a more hawkish light.
At 04:00 ET (09:00 GMT), the Dollar Index, tracking the greenback against a basket of six other currencies, traded 0.4% higher at 104.085, near a three-week high and poised for a second week of gains.
Strong U.S. Economy Boosts Dollar
The Swiss National Bank’s unexpected interest rate cut and its reasoning regarding the strength of the franc triggered a significant shift in market sentiment. The Swiss franc, which had been the top-performing G10 currency in 2023, experienced a more than 1% drop overnight, continuing its decline on Friday, with USD/CHF rising by 0.4% to 0.9009, inching closer to parity.
This move prompted traders to reevaluate their expectations for the Federal Reserve’s future actions, especially after this week’s FOMC meeting reaffirmed the likelihood of three interest rate cuts in 2024, contingent on economic data.
The Fed’s upgraded growth outlook for 2024 and positive economic indicators, including a drop in unemployment claims and increased home sales in February, indicate a resilient U.S. economy, reducing the urgency for rate cuts.
However, analysts at ING noted that the dollar’s rapid appreciation may be excessive, as the Fed has signaled that it will consider rate cuts if inflation shows downward momentum.
Sterling Slumps, BoE Rate Cut Expectations Rise
In Europe, GBP/USD declined by 0.5% to 1.2588, hitting a one-month low following the Bank of England’s decision to keep interest rates unchanged. However, two MPC members abandoned their calls for a rate hike due to easing inflation.
Bank of England Governor Andrew Bailey acknowledged that expectations of interest rate cuts this year were not “unreasonable,” leading markets to anticipate easing measures, possibly starting in June.
EUR/USD also traded lower by 0.4% to 1.0814, reflecting grim manufacturing outlook data in the eurozone.
Meanwhile, USD/JPY remained close to its highest level in four months at 151.59, with the yen facing losses, and USD/CNY rose above 7.2 for the first time since November 2023.
AUD/USD dropped 0.8% to 0.6515, reflecting weakened risk sentiment in the market.
