Dollar gains on solid retail sales, before Fed meeting

Amr Abdallah Dalsh | Reuters

The dollar index climbed to its highest level in a week on Friday after encouraging retail sales data for May eased fears that the U.S. economy is slowing sharply, ahead of the Federal Reserves meeting next week.

The Commerce Department said on Friday retail sales rose 0.5% last month, just slightly below economists expectations of a 0.6% gain.

Data for April was revised up to show retail sales gaining 0.3%, instead of dropping 0.2% as previously reported.

The dollar has recovered in the last week from a weak start to June, as investors consider whether rate cut expectations have gotten too far-fetched relative to the data.

With international economic growth slowing, investors are nervous that U.S. President Donald Trump will impose tariffs on Japan and Europe, which could result in more dovish central banks globally and give the dollar a relative advantage.

The U.S. economy is also seen as better placed to handle trade tensions than other countries.

The dollar has benefited to date from negative globalization news as the domestic side of the U.S. economy has looked sufficiently robust to deal with trade-related headwinds, Morgan Stanley analysts said in a report on Friday.

Other countries look less resilient in the face of trade tensions due to higher exposure to global import demand, dependence on manufacturing exports, and underdeveloped domestic demand, they said. Chinese data on Friday flashed more warning signs in May, with industrial output growth unexpectedly slowing to a more than 17-year low and investment cooling, underlining a need for more stimulus.

The Fed is not widely expected to lower interest rates when it meets on June 18-19, though investors will watch for new signals that a cut may come in July.

Interest rate futures traders are pricing in a 23% chance of a cut in June, and an 87% likelihood of at least one cut in July, according to the CME Group's FedWatch Tool.

The other major catalyst for the dollar in the near term is whether the United States and China will renew trade negotiations at the G20 summit on June 28-29.

Trump said on Friday it didnt matter if Chinese President Xi Jinping attends the summit, adding that China would eventually make a trade deal with the U.S.

Economic conditions are not bad enough for a rate cut, investor says