Dollar Index Rebounds After Retail Sales Fall in March and Fed Warns of Inflation

The U.S. dollar has been bouncing off a one-year low against a basket of currencies, following the release of data showing retail sales fell in March.

This is coupled with a warning from a key Federal Reserve official that interest rates need to continue to be raised to bring down inflation. While investors are anticipating a slowdown later in the year, the economy remains relatively strong.

Senior foreign exchange strategist at TD Securities in New York, Mazen Issa, said, “The overarching theme is you’re getting a slowdown… I think what gets overlooked is it may take longer for things to unfold, maybe a grind, and the U.S. economy is more resilient than people have given it credit for.”

The dollar initially fell, but then reversed and moved higher after U.S. retail sales fell more than anticipated, with consumers cutting back on purchases of motor vehicles and other big-ticket items.

Issa added, “It was generally on the weak side with the exception of the retail sales control group, which is super core retail sales, it was just a little less negative than expected and makes you think that maybe the market was looking for something much weaker.”

This data was released just before Federal Reserve Governor Christopher Waller warned that despite aggressive rate increases over the past year, the central bankers haven’t made much progress in returning inflation to their 2% target and that interest rates still need to be raised.

Atlanta Fed President Raphael Bostic also suggested that one more quarter-percentage-point interest rate hike could allow the Fed to end its tightening cycle with some confidence that inflation will return to its 2% target.

Currently, Fed funds futures traders are pricing in an 85% probability that the Fed will hike by an additional 25 basis points at its May 2-3 meeting.

The dollar has dropped due to cooling inflation, with consumer prices barely rising in March and producer prices unexpectedly falling in the same month. However, some of Friday’s rebound may be investors taking profits from trades betting on a dollar decline.

As of the end of Friday, the dollar index was up 0.26% on the day at 101.22, after earlier falling to 100.78, the lowest since last April. The euro fell 0.23% to $1.1025, while the dollar gained 0.35% against the yen to 133.05.