The US dollar staged a dramatic comeback on Friday, rising against most major currencies after data from the University of Michigan revealed a significant shift in consumer sentiment.
The key driver? A surge in inflation expectations. The survey found that consumers anticipate both short-term and long-term inflation to rise in the coming months. This is a critical data point for the Federal Reserve, as inflation expectations can become self-fulfilling prophecies, influencing wage demands and pricing decisions.
The report also revealed a surprising decline in consumer confidence, falling well below analyst predictions. This contradicts other positive economic signs like a strong labor market and recent stock market highs. Economists are now grappling to understand this unexpected drop in optimism.
Despite the weaker consumer outlook, the dollar found favor as investors sought a safe haven. The data reinforced expectations of a more aggressive Federal Reserve monetary policy, with market projections for interest rate hikes rising slightly. This, combined with higher bond yields, further bolstered the dollar's appeal.
While the Canadian dollar and Swedish krona held onto some gains, the US dollar dominated most currency pairs. The coming week's retail sales figures will be closely watched to shed light on actual consumer spending and provide a clearer picture of the US economic landscape.