The U.S. dollar was just below a six-month high in early European trading on Friday, having strengthened overnight following U.S. economic data, while the yuan got a boost from better-than-expected Chinese data.
Markets were adjusting to a new outlook for central bank rate hikes after the European Central Bank on Thursday raised rates to a record high of 4% but signalled the hike was likely to be its last. Euro zone bond yields and the euro fell as investors bet the central bank would start cutting rates next year.
For currency markets, the focus is on the divergence between the ECB and U.S. Federal Reserve’s monetary policy plans, said Joel Kruger, a currency strategist at LMAX Group.
“If we’re heading to a place where there’s going to be continued pressure on the Fed to be needing to be thinking about higher interest rates while the other central banks are pricing in peak rates, then that would suggest that there is potential for more upside to the U.S. dollar,” he said.
At 0756 GMT, the U.S. dollar index was down 0.2% on the day at 105.22, having eased from Thursday’s six-month peak of 105.43. Still, it was on track for its ninth weekly gain in a row.
U.S. retail sales increased by more than expected in August, as a surge in gasoline prices boosted receipts at service stations.
The euro was up 0.2% at $1.06625, having recovered slightly from Thursday’s multi-month low of $1.0632.
“We think that at this stage EUR/USD will revert to being even more driven by the dollar leg,” ING FX strategist Francesco Pesole said in a client note.
“Markets have taken on board the notion that the ECB has likely peaked, meaning that data releases in the euro zone should lose some degree of market relevance.”
China’s yuan got a boost from economic data in early Asian trading, which showed industrial output and retail sales grew at a faster-than-expected rate in August.
The dollar was down around 0.2% against the offshore yuan, with the pair at 7.2746.
The yuan weakened on Thursday after the People’s Bank of China (PBOC) announced it would make its second 25-basis point cut to banks’ reserve requirement ratio this year, a move aimed at supporting a shaky economic recovery.
Analysts said downward pressure on the yuan remained, as China’s economic recovery is far from certain.
“I don’t think there are any structural changes that have happened that are significant enough to suggest that we’re going to see a major reversal. I feel it’s more a bit of a pause,” said LMAX’s Kruger.
Commodity currencies have benefited from a rise in energy prices, with oil on track to gain for the third week in a row.
Britain’s pound was up 0.2% at $1.2438.
The dollar was up 0.2% against the Japanese yen, at 147.745.