Dollar ticks up as odds for interest rate hikes rise; spotlight on Trump in China

The U.S. dollar firmed on Thursday, as traders this week upped their bets for interest rate hikes from the Federal Reserve later this year after inflation and retail sales data. Meanwhile, President Donald Trump’s visit to China grabbed the spotlight, with market participants hoping for breakthroughs on trade, artificial intelligence, and possibly the Iran war. 

The U.S. dollar index, which tracks the greenback against a basket of six major peers, rose 0.3% to 98.82. 

Retail sales show consumers shrugging off high gas prices, but inflation still in focus

Thursday’s economic calendar did not have any inflation indicators, but the docket was highlighted by April retail sales. As per the U.S. Census Bureau, retail sales ticked up 0.5% M/M, matching the consensus estimate but decelerating from March’s 1.6% rise.

"Shoppers shrug off higher gasoline prices," José Torres, senior economist at Interactive Brokers, said. "April retail sales expanded for the third consecutive month, reflecting a robust consumer who hasn’t had trouble managing rising costs," he added.

The retail sales report follows a hot consumer price index (CPI) report on Tuesday was followed by similarly hot producer price index (PPI) data on Wednesday.

"While nominal topline sales looks good one must adjust it for inflation. Once one does that (a) solid 0.5% increase turns into a sober -0.1% decline. The control group (eased) back from a 0.5% to an inflation adjusted 0.3%. Outlays at gasoline stations were up 2.8%," Joseph Brusuelas, principal and chief economist at RSM US, said on X. 

"Bottom line: the consumer & economy can take a Mike Tyson type punch. Both are dynamic and resilient. But let’s make sure this does not turn into a Pyrrhic victory," Brusuelas added.

Traders have reacted to the inflation and retail sales data this week by increasing their expectations for interest rate hikes from the Federal Reserve later this year, according to the CME FedWatch tool. The reports show that spiking oil prices due to the Middle East conflict are having a notable impact on the economy, and odds of interest rate cuts have all but disappeared. Higher rates generally bode well for the dollar.

Eyes on China

Turning to geopolitics, all eyes were on Trump’s visit to China, the first by a sitting U.S. president since Trump’s own visit in 2017.

Trump and Chinese counterpart Xi Jinping ended their first round of talks during a two-day summit, with Xi telling state media that negotiations around trade in particular were making progress. However, he flagged that pushback from the U.S. over Taiwan could sour relations.

Trump told Fox News that Iran was also discussed. China is a major importer of oil from Iran, and some analysts and observers have suggested that the Asian nation could try and play a role in diplomacy between the warring parties.

"President Xi would like to see a deal made," Trump told Fox News.

"He said, ’If I can be of any help at all, I would like to be of help,’" Trump said, adding "anybody that buys that much oil has obviously got some kind of a relationship with them."