Dollar rises as apex banks spur risk aversion

In early European trade on Friday, the U.S. dollar gained ground as several central banks, including the Bank of England, adopted a more aggressive stance on monetary tightening, sparking risk aversion in the market. The Dollar Index, which measures the greenback against a basket of six major currencies, traded 0.3% higher at 102.280, slightly above its recent one-month low.

The British pound struggled after the Bank of England surprised the market with a 50 basis points rate hike, pushing the GBP/USD pair down by 0.3% to 1.2706. Analysts at ING noted that while sterling initially reacted positively to the larger-than-expected rate hike, it later fell again on concerns that the central bank might engineer a more severe economic slowdown to control inflation. This outlook has negatively impacted the pound, seen as a growth-sensitive currency, and prompted investors to seek safe-haven assets like the U.S. dollar.

Federal Reserve Chair Jerome Powell reaffirmed his stance on raising U.S. interest rates during his two-day testimony before Congress. Powell indicated that there could be at least two more rate hikes this year to tackle high inflation. However, he emphasised the importance of pacing the rate hikes to allow the Federal Open Market Committee to assess incoming economic data. Powell’s comments supported the U.S. dollar’s strength.

The euro slipped ahead of the release of the eurozone’s purchasing managers’ index surveys, dropping 0.3% against the U.S. dollar to 1.0930. While a softening in economic activity is expected, strong PMI numbers may have a negative impact on the euro as they would imply the possibility of higher interest rates in a region that recently experienced a recession in the first quarter of the year.

In other currency movements, the Australian dollar, which is sensitive to risk sentiment, fell by 0.9% against the U.S. dollar to 0.6694. Meanwhile, the USD/JPY pair rose by 0.2% to 143.37, despite Japan’s core consumer price index reaching a 42-year high in May, indicating persistent inflationary pressures in the country.