The US dollar is higher than GDP, with jobless claims ensuring a rate hike

  • US GDP rises less than expected; Focus on central PCE
  • US unemployment claims fall
  • The Fed still sees a 25 bps hike in interest rates next week
  • The BOJ meeting takes place on Friday

TOKYO, April 27 (Reuters) – The dollar rose on Thursday as weaker-than-expected U.S. economic growth in the first quarter was seen as unlikely to prevent the Federal Reserve from raising interest rates next week.

A preliminary estimate of first-quarter gross domestic product (GDP) showed an annualized rate of 1.1% over the period. The economy grew at a 2.6% pace in the fourth quarter. Economists polled by Reuters had forecast GDP to rise by 2.0%.

However, investors focused on the quarterly inflation numbers within the GDP report. Core personal consumption expenditure prices rose 4.9% in the first three months of the year, higher than the 4.7% consensus and higher from the fourth quarter.

“The weak growth outlook tells us that the central bank is going to struggle to raise interest rates without crushing the economy,” said Amo Sahota, director of FX consultancy Klarity FX in San Francisco.

“But the conundrum of what to do with inflation still continues. The central bank has been telling us that for a long time. So the (core PCE) number made it difficult to see the fact that we’re going to get a rate hike next week,” he added.

Markets were pricing in a 90% probability of a 25 basis-point rate hike at the May policy meeting, after which there was a pause.

A separate report from the Labor Department on Thursday showed that initial claims for state jobless benefits fell by 16,000 to a seasonally adjusted 230,000 in the week ended April 22. Economists had expected 248,000 claims in the latest week.

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The report suggested an even tighter labor market and underpinned expectations of a rate hike next week.

In afternoon trade, the dollar rose 0.2% to 134 yen against the yen as the Bank of Japan began a two-day policy meeting, the first under new governor Kazuo Ueda.

Market consensus was that Ueda would keep ultra-easy policy settings unchanged on Friday, but no one was ready to rule out another surprise, such as a shock doubling of the 10-year bond yield band in December.

The dollar index rose 0.1% to 101.50.

Meanwhile, the euro fell 0.1 to $1.1024.

The performance of the Eurozone is a key factor for the Euro. Germany on Wednesday revised upward growth forecasts, and a survey showed a continued increase in consumer confidence.

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Coin auction prices at 2:56PM (1856 GMT).

Reporting by Kevin Buckland; Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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