The dollar strengthened sharply on Friday against the euro after a surprisingly strong reading on U.S. retail-sales growth calmed worries about slowing economic growth while bolstering the U.S. Federal Reserve’s case for raising interest rates twice this year.
Sales at U.S. retailers climbed 1.3% in April, the largest monthly gain in a year. Economists polled by MarketWatch expected a 1% increase.
Consumer spending is a key driver of U.S. economic growth, and the rebound in April bodes well for second-quarter gross domestic product. The Atlanta Fed’s GDPNow indicator is forecasting GDP growth of 2.8% for the second quarter, up expectations of 1.7% growth on May 4.
The ICE U.S. Dollar index DXY, +0.44% a measure of the buck’s strength against a basket of six rivals, was up 0.5% to 94.6160 late Friday in New York after briefly hitting a more than two-week high earlier in the session. The index logged a weekly gain of 0.8%—its second weekly rise in a row. The dollar gauge has logged a weekly gain in four of the past five weeks.
Meanwhile, the buck posted its second straight weekly gains against the euro and pound.
Though the retail sales report suggested consumer spending has been stronger this year than previously thought, analysts cautioned that investors would likely need to see more strong economic data before it materially impacts their expectations for the pace of Fed rate hikes.
“We won’t go a million miles on the back of one print like this but it encourages people to say ‘look, the Fed will be hiking rates and the ECB and BOJ won’t be,” said Kit Juckes, chief currency strategist at Société Générale.
In other data released Friday, producer prices rose a tepid 0.2% in April after two straight months of declines, suggesting that price inflation at the wholesale level remains largely absent. Other data released Friday was moderately more positive. The University of Michigan’s gauge of consumer sentiment showed a stronger-than-expect rise, as did a reading on business inventories.
One dollar USDJPY, -0.35% bought ¥108.64 late Friday in New York, down from ¥108.99 late Thursday in New York. The euro EURUSD, -0.6065% bought $1.1307 late Friday in New York after touching a two-week low against the dollar earlier in the session. By comparison, the shared currency traded at $1.1377 late Thursday.
The pound GBPUSD, -0.5951% also weakened, trading at $1.4368 late Friday in New York, compared with $1.4447 late Thursday.
Over the past week, several Fed officials have said two rate hikes this year remains a possibility as long as U.S. economic data continues to show improvement. Juckes said this was an attempt to correct investors’ views on what the Fed might do.
In a set of projections released in March, a majority of Federal Reserve policy makers said they expected to raise interest rates twice this year. A previous set released in December called for four hikes.
But investors have been skeptical. The Fed-funds futures market, a widely watched gauge of investors thinking on the timing of Fed rate hikes, was pricing in only a 57% probability of just one hike this year, according to a reading on the CME Group’s FedWatch tool Friday afternoon in New York.
“The market has walked itself an awfully long way from the dots and the Fed governors don’t want to let it go forever,” Juckes added.
San Francisco Fed President John Williams will speak to the Sacramento Economic Forum in Sacramento, Calif., at 6:25 p.m. Eastern Time.