Dollar’s Climb Stalls Amid Mixed Economic Signals

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A subtle shift in the economic landscape is behind the recent fall in the US currency

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Behind the slippage has been a subtle change in the economic landscape. According to recent economic reports, US consumers are still spending money at a rapid pace while employers keep adding jobs, detailing the trends that helped lift the dollar over the past 12 months.

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Yet elsewhere there are signs of weakness. Wage growth has softened compared to last year, and consumers have been able to sustain spending only by dipping into savings. The US services sector, which includes restaurant dining and travel, slowed the pace of expansion in May, and new home sales in April posted their biggest decline in nine years.
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Overall, the data has bleak some asset managers’ outlook on the US economy. They are now wary that the Federal Reserve may have to slow the pace of expected interest rate hikes. This may be welcomed by stock investors, who are fully aware of the risks of rising rates for highly valued stocks, but its meaning will be ambiguous in the currency markets.

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Investors usually buy currencies tied to countries where central banks are raising interest rates to rein in a warming economy. Investors expect the Fed to raise rates by an overall percentage point in June and July, but what will happen next is hard to determine. As a result, traders now argue that the dollar is more sensitive than usual to an economic release on the horizon.

“Six weeks of thinking the sky’s the limit for the Fed, the market is gone,” said Steve Englander, head of North American macro strategy at Standard Chartered. Now, he said, “I think the dollar is at the top.”

The sloppy outlook represents a turnaround in the markets, after investors bet that the rapid pace of rate hikes would propel the dollar higher throughout the year. Many expected that a stronger dollar would hurt American multinationals, with companies including Microsoft making their products more expensive for foreigners. Corporation

Given the strong impact of the dollar on revenue in recent reports. Analysts at JPMorgan say the dollar’s rally is hurting the US manufacturing sector, which is slowing hiring to compensate for lower exports.

Over the coming week, investors will check US consumer and Friday inflation data for clues about the state of the economy and the trajectory of the stock market. Lower inflation numbers could ease pressure on stocks and further dent the dollar, predicting a more gradual outlook from the Fed. The Bank of England started a sharp fall in the pound in May by signaling caution on raising rates.

Investors are now watching US data for similar bearish signals. Last week, the Labor Department reported that the economy added 390,000 jobs in May—more than the 328,000 expected by economists. Nevertheless, the unemployment rate remained at 3.6% instead of falling to 3.5% as expected. Monthly growth in average hourly earnings was 0.3%, well below the 0.4% consensus forecast.

Forex markets have been at their most volatile in more than a decade after other currencies fell after a surge in the dollar, and central banks around the world tackling rising inflation. The recent decline of the Businesshala Dollar Index cut this year’s gains to nearly 6%.

Currencies edged up in short-term rates, which rose sharply in March as investors bet that the Fed would raise rates in increments of half a percent or more through at least the July 26-27 meeting. The yield on the benchmark two-year US Treasury note rose nearly 0.9 percent in March alone, its biggest monthly climb since 1989.

Investors are now looking to September, when the central bank is to convene with data for several months to 2022. With the Fed’s June and July policy meetings largely uniting on the need for a half-digit hike, recent comments from Fed officials show that the debate has shifted to what should happen next. Traders say that the dollar is sensitive to any scalping-back in the rate path.

One thing that investors are watching is the housing market trying to gauge the impact of stricter lending terms. There are signs the US market is cooling off as rising mortgage-interest rates make homeownership more expensive. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 5.09% last week, up from 3.1% at the beginning of the year.

Volatility in the stock market has dented investment accounts. Higher energy costs can stifle consumer spending, dent growth and hurt the dollar.

Andrzej Skiba, head of the Bluebay US fixed-income team at RBC Global Asset Management, is short on the dollar, betting on a fall in its value against other currencies. But he feels that the recent worries about a slowdown have gone too far and will look to buy on the downside.

“It is not clear that we have seen the end of the secular hegemony of the US economy,” said Mr. Skiba.

—Sam Goldfarb contributed to this article.

Write to Julia-Umbra Verlaine at [email protected]

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