Dollar Heads for Largest Weekly Gain in Over Two Months on Fed Rate Hike Hopes
Dollar Strengthens Amid Fed Rate Hike Expectations and Global Economic Developments
By Rae Wee
Market Drivers and Global Events
SINGAPORE, May 15 (Reuters) - The dollar firmed on Friday and was set for its largest weekly gain in more than two months, as rising energy prices and prolonged disruptions to shipping stoked inflationary pressures, boosting bets on a Federal Reserve rate hike this year.
Markets were also keeping a close eye on the second day of a high-stakes summit between U.S. President Donald Trump and his Chinese counterpart Xi Jinping, with Trump seeking economic wins from Beijing against the backdrop of the Iran war.
U.S.-China Summit and Geopolitical Tensions
The U.S. summary of the talks focused on the leaders' shared desire to reopen the key waterway of the Strait of Hormuz, which Iran has effectively shut since the war began late in February, and Xi's apparent interest in buying American oil to reduce China's dependence on Middle East supplies.
Market reaction to the talks has so far been muted as investors awaited more details, but the offshore yuan was perched near its highest level in more than three years and stood at 6.7874 per dollar.
"The meeting is broadly in line with market expectations and slightly constructive at the margin," said Cliff Zhao, chief economist at CCB International.
"A better tone is helpful, but markets will still look for more clarity on trade, business access and specific policy arrangements."
Dollar and Currency Market Movements
In the broader market, the dollar was on the front foot, rising to a two-week high of 98.98 against a basket of currencies.
For the week, the dollar index was set to rise more than 1%, capping off its sharpest increase since early March.
The greenback's strength pushed the yen to the weaker side of 158 per dollar and kept traders on alert for further intervention from Tokyo. The Japanese currency was fetching 158.45 in early Asia trade and was on track to lose more than 1% for the week.
The euro fell 0.04% to $1.1662, also headed for a weekly fall of over 1%.
Betting on Fed Hikes
Inflation and Economic Data
The dollar rally has been gathering pace all week, on the back of evidence that domestic inflation is mounting while the U.S. economy remains resilient despite the ongoing Middle East conflict.
Data on Thursday showed U.S. retail sales increased further in April while weekly initial jobless claims figures pointed to stability in the labour market.
Market Expectations for Fed Policy
Investors are now pricing in just over a 44% chance that the Fed could raise rates in December, compared to a 22.5% chance a week ago, according to the CME FedWatch tool.
"While we are still cognizant of the softer domestic demand conditions that are being weighed down by rising energy costs, our U.S. CPI forecasts have been revised higher in 2026 again with risks still biased towards the upside," said Alvin Liew, senior economist at UOB.
"We now expect an extended period of pause to cover the remainder of 2026 before the Fed resumes easing in 2027."
Other Major Currencies React
Sterling and Political Developments in the UK
In other currencies, sterling fell to a one-month low of $1.3385, having slid 0.9% in the previous session following the resignation of British health minister Wes Streeting, deepening the political crisis there.
"The prospect of a potentially disruptive leadership transition and yet another challenging fiscal backdrop heading into the autumn is likely to weigh on sentiment," said Henry Cook, senior Europe economist at MUFG Bank.
"We see the balance of risks to the UK outlook as firmly skewed to the downside."
Australian and New Zealand Dollar Movements
The Australian dollar edged away from its recent four-year peak on the back of the greenback's strength and traded 0.04% lower at $0.7217.
The New Zealand dollar eased 0.14% to $0.5903.
(Reporting by Rae Wee and Jiaxing Li;Editing by Shri Navaratnam)
