Market News

(Bloomberg) -- The dollar strengthened Thursday and was poised for a second week of gains, after reports on consumer spending and the labor market added to signs of resilience in the US economy.

A gauge of the currency’s performance against global peers settled 0.3% higher with the greenback strengthening against the euro, yen and the pound.

Retail sales for June came in stronger than expected and weekly initial jobless claims were below estimates, signals that the economy is holding up even as some fret over the impact of President Donald Trump’s tariffs. Traders now see the likelihood of an interest-rate cut at September’s Federal Reserve meeting as a coin toss, whereas it was previously seen as a lock.

“The market has refocused on the narrative of a resilient US economy with burgeoning inflation pressures,” said Aroop Chatterjee, a strategist at Wells Fargo. “Market pricing for Fed cuts continues to decline.”

Yields across most US Treasuries rose Thursday in a choppy session. Yields on two-year notes, which are most sensitive to changes in monetary policy, rose three basis points to 3.92%.

Thursday’s gains for the dollar marked a rebound from the previous session, in which it slumped after Trump floated the idea of firing Fed Chair Jerome Powell. It’s now up 0.7% this week, on track to close out its second weekly gain for the first time since May.

An hour after those reports, Trump walked back the threat, calming a brief outbreak of volatility in markets. Still, the latest escalation spooked investors over the prospect of political interference at the central bank.

“Any central bank’s biggest asset is its credibility, so if that were to go, through a firing, the market will take it very badly,” Kokou Agbo-Bloua, Societe Generale SA’s global head of economics & cross-asset research, told Bloomberg TV, adding that speculation about a replacement would increase swings in US asset prices and weaken the dollar.

Concerns over that situation are expected to continue hanging over markets and put pressure on the dollar and Treasuries, said George Saravelos, global head of FX research at Deutsche Bank AG. “This underlying story, so long as it lingers, it will act as a big headwind both to the dollar and to fixed income, until it gets resolved one way or another,” he told Bloomberg TV.

For now, better-than-expected US data has supported the greenback, said Yusuke Miyairi, a foreign-exchange strategist at Nomura. While investors had expected tariffs to hurt the US economy, “the US data haven’t shown any strong indication of growth weakness,” Miyairi said.

Treasuries

Meanwhile, activity in the options linked to the Secured Overnight Financing Rate, which closely tracks Fed policy expectations, showed traders looking to hedge the possibility that the Fed will cut rates at a faster pace or to a greater degree than the market has priced in. The volumes over Wednesday’s session in SOFR futures topped six million for the first time in about six weeks as traders looked to re-position around the news.

Chief economist at Apollo Management Torsten Slok believes the market is overpricing the chances of further reductions this year, as the Fed will have to assess the inflationary impact of tariffs and deportations.

“The market is way, way too eager to price in cuts,” he told Bloomberg TV. Slok sees one rate cut by the end of the 2025, while the market is leaning to two cuts.

--With assistance from Isabella Ward, Ye Xie and George Lei.

(Recasts with dollar’s performance.)