On Friday, the US dollar declined after February’s labor data showed that wage growth had slowed down.
This suggested that inflation pressures would fall, thereby reducing the pace of interest rate hikes by the US Federal Reserve as well as the appeal of the greenback.
The data
February saw the US economy add new jobs at a brisk pace, but wage growth was slower and unemployment rate went up.
This saw the financial markets dial back their expectations of another interest rate hike of 50 basis points in the next meeting of the US Federal Reserve in two weeks.
Earlier in the week, Jerome Powell, the chairman of the Fed, delivered congressional testimony that was considered hawkish.
This had given the US dollar a boost because a higher yield is generated via Treasuries than any other government debt.
The decline
The US dollar fell against all major currencies, with the exception of the Canadian dollar against which it remained flat.
There was a 0.618% decline in the US dollar index. Treasury yields also fell because of the SVB Financial Group’s closure, which is the biggest bank failure since the financial crisis hit.
The regulators in California stepped in quickly for protecting the startup-focused bank’s depositors. There was the biggest decline in the yield on Treasury notes in a single day in the last four months.
The analysis
Market analysts said that the greenback was likely to be range-bound because bringing inflation down to the 2% target of the Fed was not going to be easy.
Once the market expectations of a rate hike rise, so does the US dollar, but once they settle down, the dollar drops.
The market has already priced in a pause in rate hikes this year, but they are unsure of when. Expectations of a 50 basis points rate hike have declined to 41%, which had been 71.6% a week earlier.
Analysts said that interest rate hikes of 25 basis points were more sensible at this point, as they would enable the Fed to continue tightening for a longer duration.
This would ensure that the data is able to catch up and inflation can come down.
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