The US dollar continued the recovery begun May 3 and rose against most of the major currencies over the past week. A nearly 3.5% rally in oil prices, the fifth weekly gain in the past six weeks (a $9.5 advance over the period), helped the Norwegian krone turn in a steady performance. The Canadian dollar’s 0.2% decline put it in second place.

With the strongest rise in US retail sales in a year, prompting the Atlanta Fed’s GDPNow tracker to rise to 2.8% for Q2, many observers are linking the dollar’s strength to a greater risk of Fed tightening. While we are sympathetic to the idea that the market was underestimating the likelihood of Fed hikes this year, the fact of the matter is that market expectations have not changed, even though greenback is trading better, and the Dollar Index has risen in four of the past five weeks.

The June Fed funds futures imply an average effective rate of 37.5 bp next month. It was 38.5 bp at the end of April. There has been more talk about the possibility of a July hike, though it is not accompanied with new forecasts or a scheduled press conference. At the end of April, the implied yield was 40.5 bp. After the retail sales report, it finished last week at 38.5 bp. In recent weeks, the effective Fed funds rate has averaged 37 bp. Over the past two weeks, the US two-year premium over Germany has is flat (narrowed a single basis point).

The divergence between economists and the market has narrowed, according to the latest Wall Street Journal survey. The economists have moved toward the market rather than the other way around. For the first time since February, a majority of the poll does not anticipate a June hike. In April, three-quarters of the economists saw a June move. Now 31% do, and 21% envision a July hike. Another 31% anticipate a September hike.

For the second week in a row, the euro rose in one of five sessions. Over the past two weeks, it has lost a 1.5 cents. The US retail sales data before the weekend and the downward revision to Germany’s April CPI (-0.4% rather than -0.2%) helped push the euro through an uptrend drawn off the March 10 Draghi-induced lows. It was found near $1.1375 and dovetails with the 20-day moving average.