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The U.S. dollar gained Tuesday, pushing it into positive territory for 2018, as expectations persisted for a gap between interest-rate policy in the U.S. and in other major global powers.
The pound fell below $1.37 for the first time since January, following data that showed U.K. manufacturing activity eased to a 17-month low in April.
May Day holidays in parts of Europe and Asia were keeping trading thin.
What are currencies doing?
The ICE U.S. Dollar Index rose 0.4% to 92.183. The benchmark logged a 2.2% gain for April, according to FactSet data, its best month since November 2016—the month of the presidential election. The broader WSJ U.S. Dollar Index was 0.4% higher at 85.91 early Tuesday.
The British pound dropped to $1.3680, compared with $1.3765 late Monday in New York.
The euro declined to $1.2028 from $1.2079 on Monday, also marking a new lowest level since January.
The yen fell against the dollar, with the greenback buying ¥109.69, compared with ¥109.34 on Monday.
Against its Canadian rival , the U.S. dollar was worth C$1.2870, versus C$1.2843 late Monday.
What is driving the market?
The Federal Reserve’s two-day interest-rate meeting begins on Tuesday. The Fed is widely expected to keep rates on hold when it concludes the sitdown on Wednesday, but the rate setters could signal they are ready to hike in June or change their estimate of two more rate hikes in total this year.
Meanwhile, the British pound continued its descent, as investors started to rule out a Bank of England interest rate rise at its May 10 meeting. Just two weeks ago, the market pricing implied a more than 80% probability of a BOE hike in May. But following a string of disappointing U.K. economic data, that policy tightening is seen as off the table for now.
Reported Tuesday, the Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) dropped a full point to 53.9 in April. The report follows official figures from Friday that showed Britain’s economy barely grew in the first three months of 2018, with extreme winter weather only partly to blame. Separate figures from the BOE showed consumer borrowing slowed sharply in March, in line with earlier data showing a big fall in retail sales that month.
Markets are also focused on Friday’s April U.S. non-farm payrolls report, which could back up the pro-U.S. currency stance.
Most analysts had been negative on the dollar this year. They expected that ballooning U.S. government borrowing and a Trump administration presumably bent on a weaker currency would depress the dollar at the same time as investors flocked back to a more robust eurozone.
The opposite has largely played out. And even geopolitical tensions, including around a U.S.-China trade spat, have eased in recent weeks, which is supporting the greenback. Traders are likely to watch U.S. Treasury Secretary Steven Mnuchin’s visit to China this week for high-level trade talks.
Meanwhile, the White House said late Monday that broad tariffs of 25% on steel and 10% on aluminum—already in effect against China, Russia, Japan and others—won’t take effect for the EU Tuesday as previously planned. Instead, Europe will have an additional month to keep talking with the U.S. about a new pact to avoid the tariffs. As expected, Canada and Mexico were given an extension, also until June 1, while talks about rewriting the North American Free Trade Agreement proceed.
What are strategists saying?
“The key USD driver has been the divergence between economic data in the U.S. and the rest of the world, and U.S. data continues to look comparatively robust,” said Hans Redeker, currency analyst at Morgan Stanley, in a note. “U.S. Q2 growth is tracking at 2.8%, a rate that is well above trend.”
BNY Mellon strategists said in a note that if the Fed lightens cautionary comments on its inflationary outlook, then it would signal a growing confidence among policy makers that inflation has firmed up enough for an increase in forecasts. That would possibly open the door to more aggressive rate moves this year.
What else is in focus?
The U.S. Markit manufacturing PMI for April is due at 9:45 a.m. Eastern Time, followed by the ISM manufacturing index for the same month at 10 a.m. Eastern.
Construction spending data for March are slated for release at 10 a.m. Eastern as well, while monthly auto sales will trickle out through the day.
Check out: MarketWatch’s Economic Calendar
In other assets, U.S. stock futures pointed to a lower open. For the month of April, the Dow logged a 0.3% gain, cutting its year-to-date loss to 2.3%. The S&P rose 0.3% in April, but is still down 1% in 2018. The tech-laden Nasdaq rose less than 0.1% on the month, with a year-to-date advance of 2.4%.
Longer-dated U.S. Treasury yields steadied, back below the closely watched 3% line, with the 10-year note last yielding 2.957%. Gold futures dropped 0.7%, while oil futures slid 1%.