Dollar stumbles as markets rethink interest rate path
The U.S. dollar slid on Friday and headed for its first weekly decline this month as traders cut bets on where interest rates could peak and shared their views on the timing of rate cuts. rates to counter a possible recession.
An important factor this week was the fall in oil and commodity prices, which eased inflation fears and allowed equity markets to rebound. This eroded the safe-haven supply that boosted the dollar against major currencies.
At around 10:45 GMT, the dollar index, which measures the greenback against six major currencies, slipped 0.2% to 104.22. That reversed a 0.2% rise on Thursday, mostly driven by a decline in the euro after weak data on business activity reduced bets on European Central Bank tightening.
The dollar, up 9% this year, has lost some of its luster since investors began betting that the Fed could slow the pace of rate tightening after another 75 basis point hike in July. They now see rates peak next March at around 3.5% and fall nearly 20 basis points by July 2023.
That rate hike sent 10-year Treasury yields down to two-week lows, while the dollar index lost 0.4% this week.
For now, however, Fed Chairman Jerome Powell has underscored the central bank’s “unconditional” commitment to controlling inflation. Fed Governor Michelle Bowman also backed 50 basis point hikes for “next” meetings after July.
Analysts also noted that the repricing of terminal rates was happening in the developed world as fears of recession grew.
“Market price revision…has held the dollar back, but a countervailing force is the risk of a global slowdown. The Fed is pretty much on autopilot. Until they ease the brakes, dollar weakness will be limited,” said Stephen Gallo, BMO Capital Markets Strategist.
“Rate hikes are also being removed from the euro and pound markets,” he noted.
The yen, sensitive to swings in US yields, rose 0.1% around 134.9 to the dollar and was poised to break a three-week streak of losses in which it fell to successive lows of 24 years beyond 136.
“If US Treasury yields peaked, so did the dollar/yen. If you combine better Japanese GDP growth with a spike in US yields, it’s a benign environment for yen strength,” said Mizuho senior economist Colin Asher, who expects the yen is around 130 by the end of the year.
The euro rose 0.2%, after Thursday’s 0.4% plunge triggered by weaker-than-expected PMI figures for June and Germany triggering the ‘alarm phase’ of its contingency plan for gas.
The fall in the greenback boosted even commodity-focused currencies such as the Australian dollar and the Norwegian krone. The Aussie rose 0.14% to $0.6904, although it remained on course for a third straight weekly decline.
The Norwegian krone, fresh off Thursday’s 50 basis point rate hike, gained 0.9% and 0.5% against the euro.
The euro also slipped 0.25% against the Swiss franc to hold just off the February low hit on Thursday.
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