The dollar headed for its first weekly gain in nearly two months on Friday as investors raised their bets that the Federal Reserve will increase rates in May, while a surprising recovery in the euro zone economy in April underpinned the euro.

The dollar index, which measures the performance of the US currency against six others, rose 0.1% on the day and headed for a weekly gain of 0.4%, its first since late February.

The recovery in the euro zone unexpectedly gathered pace this month, thanks to a boom in services sector demand compensating for a deepening decline in manufacturing.

Preliminary surveys showed that same dynamic in Germany and France, the region’s two largest economies.

The euro was last flat against the dollar $1.0973, but recovered from a session low of $1.0938. Against sterling, it rose 0.5% to 88.86 pence.

But the story this week has been one of dollar dominance. Fed officials have been at pains to point out that inflation remains uncomfortably high and rates must keep rising.

Money markets show traders believe there will be a quarter-point US rate hike next month, which in theory is supportive of the dollar, but this will be quickly followed by a series of rate cuts, as the economy slows, which kept the US currency’s gains in check.

Published in The Express Tribune, April 22nd, 2023.

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