Dollar rallies, markets scale back cuts

The U.S. dollar extended its advance on Friday, rising for a fourth straight session as investors pared back expectations for Federal Reserve rate cuts after a run of firmer U.S. inflation readings. The dollar index touched 98.98 and was on track for its largest weekly rise in more than two months, according to Reuters market reporting. U.S. Treasury yields also moved higher this week after April consumer prices and import prices both accelerated. Markets have shifted from debating when the Fed might cut again to whether policy could stay unchanged for much longer. ### Why did the dollar strengthen this week? Friday’s move followed a series of U.S. data releases that pointed to renewed price pressure. The Bureau of Labor Statistics said on May 12 that the consumer price index rose 0.6% in April from the prior month and 3.8% from a year earlier, after a 3.3% annual increase in March. Energy prices rose 3.8% in the month and accounted for more than 40% of the monthly increase, the agency said. Thursday’s import-price report added to that picture. The Bureau of Labor Statistics said U.S. import prices rose 1.9% in April after a 0.9% increase in March, while prices for fuel imports jumped 16.3%, the biggest monthly increase since March 2022. Reuters reported that the 12-month increase in import prices reached 4.2%, the largest since October 2022. ### What changed in rate-cut expectations? (bls.gov) CME FedWatch said traders were using fed funds futures to price out much of the chance of near-term easing. CNBC reported on May 12 that market pricing had taken “virtually any chance” of a cut off the table through the end of 2027 and implied about a 37% probability of a rate increase before the end of 2026. (bls.gov) Mark Zandi, chief economist at Moody’s Analytics, told CNBC that inflation expectations would be the deciding factor for the Fed. “At this point, I suspect they just stay on hold,” Zandi said, adding that if inflation expectations continued to rise, even holding rates steady could become more difficult. ### How far did yields move? (cmegroup.com) The Federal Reserve’s H.15 release dated May 14 showed the 2-year Treasury yield at 3.98% on May 13, up from 3.90% on May 8. The 10-year yield rose to 4.46% from 4.38% over the same period, while the 30-year yield climbed to 5.03% from 4.95%. Those moves lifted the return available on dollar assets and helped support the currency. Reuters market reporting on Friday said the dollar’s weekly gain was set to exceed 1%, which would mark its strongest weekly rise since early March. (cnbc.com) The same report said investors were also monitoring the second day of talks between President Donald Trump and Chinese President Xi Jinping, though the market response to the summit had been limited. (federalreserve.gov) ### Why does this matter for companies outside the bond market? A stronger dollar and higher U.S. yields feed directly into financing and currency costs for companies that borrow in dollars or buy goods priced in dollars. Reuters reported on Thursday that firmer inflation had cemented expectations the Fed would keep its benchmark rate in the 3.50%-3.75% range into 2027. That leaves importers, multinationals and borrowers facing a period in which refinancing costs remain elevated and foreign-exchange swings can become harder to manage. (economictimes.indiatimes.com) April’s import-price report also showed nonfuel import prices rose 0.8% on the month and 2.9% on the year, with higher prices for capital goods and consumer goods excluding autos. Those figures matter for companies that depend on imported inputs even when oil prices are stripped out. ### What are markets watching next? June 17 is the date of the next Federal Open Market Committee meeting, according to CME FedWatch. (money.usnews.com) Between now and then, traders will be watching incoming inflation, labor-market and commodity-price data for evidence on whether April’s price pressures persist. (cmegroup.com) (bls.gov)