Dollar bounces as retail sales drop, Fed governor hawkish

SINGAPORE, April 14 (Reuters) – The dollar index bounced off a one-year low against a basket of currencies on Friday after data showed retail sales fell in March, while a key Fed official warned that the U.S. central bank needs to continue hiking interest rates to bring down inflation.

Investors are pricing in the probability that the Fed will need to cut rates later this year on an expected slowdown; however, the economy remains relatively resilient for now.

“The overarching theme is you’re getting a slowdown,” said Mazen Issa, senior foreign exchange strategist at TD Securities in New York. “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, and then reversed and moved higher after data showed U.S. retail sales fell more than expected in March as consumers cut back on purchases of motor vehicles and other big-ticket items.

“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,” said Issa.

The data came just before Fed Governor Christopher Waller said on Friday that despite a year of aggressive rate increases, U.S. central bankers “haven’t made much progress” in returning inflation to their 2% target and need to move rates higher still.

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

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 as data this week shows cooling inflation, with consumer prices barely rising in March, while producer prices unexpectedly fell in the month. Some of Friday’s rebound, however, may be investors taking profits from trades betting on a dollar decline.

The dollar index was last 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. It earlier hit $1.10755, the highest since last April. The dollar gained 0.35% against the yen to 133.05.

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Currency bid prices at 9:42AM (1342 GMT)

Reporting by Rae Wee; Editing by Christopher Cushing

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