Dollar rebounds on higher expectations for Fed hike in May

The dollar bounced from a one-year low on Monday as resilience in core U.S. retail sales, a rise in short-term inflation expectations and impressive Wall Street bank earnings raised market expectations for an interest rate hike in May.

While U.S. retail sales fell more than expected in March, so-called core retail sales, which excludes automobiles, gasoline, building materials and food services, slipped just 0.3% last month, data released on Friday showed.

Adding to the mix of resilient U.S. economic data was a strong run of first-quarter 2023 earnings from JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co, brushing off concerns about a banking crisis that unfolded in March.

Against a basket of currencies, the U.S. dollar index rose 0.15% to 101.82, standing some distance away from Friday's one-year low of 100.78.

Friday marked the fifth straight weekly loss for the index.

The euro fell 0.2% to $1.0965, while sterling slipped 0.22% to $1.2387.

"The U.S. bank earnings came out much better than expectations, which suggests that the U.S. economy is not so bad ... So I think that will increase (expectations) for the Fed to continue raising interest rates," said Tina Teng, market analyst at CMC Markets.

Money markets are now pricing in a roughly 81% chance that the Federal Reserve will raise interest rates by 25 basis points next month, up from about a 69% chance last week.

Short-term inflation expectations have also increased, with the University of Michigan's preliminary April reading showing that one-year inflation expectations rose to 4.6% from 3.6% in March.

Yields on U.S. Treasuries jumped in the wake of the data releases on Friday, and remained elevated on Monday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, stood at 4.1137%, after hitting a roughly two-week top of 4.137% on Friday.

The benchmark 10-year yield was last at 3.5261%.

Some hawkish Fed speak also aided the higher interest rate expectations, with Fed Governor Christopher Waller and Atlanta Fed President Raphael Bostic suggesting that the Fed could hike another 25 bps next month.

In other currencies, the dollar rose 0.16% against the Japanese yen to 133.96, as the Bank of Japan remains a dovish outlier as it continues to keep interest rates ultra-low.

The Aussie slipped 0.19% to $0.6696, while the kiwi fell 0.39% to $0.6186.

Over in Asia, a raft of economic data from China out this week takes centre stage, as traders look for clues on how the recovery in the world's second-largest economy is playing out.

"We expect March activity data to show moderate growth momentum acceleration, but (are) unlikely to see large positive surprises," analysts at MUFG said.

Last week, China reported an unexpected surge in its exports in March, which shot up 14.8% from a year earlier, snapping five straight months of declines.

The offshore yuan fell more than 0.1% to 6.8807 per dollar.