Investing.com – The dollar rallied against a basket of major currencies, turning positive for the year, shrugging off mostly weaker economic data as a slump in sterling supported upward momentum.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose by 0.62% to 92.20, a four-month high.
The Institute of Supply Management's manufacturing index fell to a reading of 57.3 in April, down from the 59.3 reading seen in the prior month, missing economists’ forecast for a reading of 58.6.
Manufacturing activity in April, meanwhile, was unchanged from the previous month, while construction spending unexpectedly fell 1.7%.
Some analysts downplayed the weaker ISM manufacturing data, citing expectations for tax reform to support factory activity this year.
“We continue to expect tax reform, particularly related to the accelerated depreciation of machinery and equipment will support factory activity this year,” CIBC said.
The mostly negative economic reports come as the FOMC meeting gets underway later Tuesday, ahead of an interest rate decision, which will be accompanied by a monetary policy statement.
The Fed is expected to leave interest rates unchanged and repeat its narrative of gradual rate hikes ahead of a widely expected June rate hike, Morgan Stanley said.
“We expect the Fed to next hike rates at its June meeting, with little change in the ‘dots’ and forecasts. We continue to look for a total of three hikes this year, followed by a pause, and two additional hikes in 2019 where we think the hiking cycle ends,” Morgan Stanley said.
The greenback’s rally to a four-month high was helped by weakness in sterling after UK manufacturing activity in April fell to a 17-month low, further denting investor expectations for a Bank of England rate hike next month.
GBP/USD fell 1.05% to $1.3621, while EUR/USD fell 0.50% to $1.2011.
USD/JPY rose 0.35% to Y109.67, while USD/CAD rose 0.05% to C$1.2850. The latter pair came under pressure following upbeat Canada GDP data.