Euro slumps after bleak PMIs, dollar drops vs yen

LONDON/NEW YORK : The euro fell across the board on Thursday as weaker-than-expected German and French PMI data confirmed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big interest rate hikes from the European Central Bank.

High prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 when the coronavirus pandemic was taking hold, with S&P Global’s headline factory Purchasing Managers’ Index (PMI) falling to a near two- year low of 52.0 from 54.6.

“The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the US,” said Mazen Issa, senior FX strategist in a research note.

“This dynamic is typically consistent with further US dollar resilience. This could be bolstered as recession fears mount,” he added.

Following the data, money markets priced in about 30 basis points (bps) of rate hikes in July compared to 34 bps on Monday. Traders also trimmed their expectations of how much the ECB will hike rates by the end of 2022 to 161 bps compared to 176 bps on Monday.

Against the US dollar, the single currency declined 0.4 per cent to $1.0522. It earlier declined below a key $1.05 level for the third time this week. The euro also declined 1.6 per cent versus the Japanese yen

The euro’s losses pulled the dollar away from earlier lows and sent the greenback into positive territory against its rivals after careful comments by Federal Reserve Chair Jerome Powell on Wednesday weighed on sentiment.

The dollar index inched higher to 104.34, up 0.1 per cent.

While markets have steadfastly held to the view the Fed is on track to raise interest rates by another hefty 75 bps in July, some analysts believe the ECB and the Bank of England will adopt a softer rate increase path or risk damaging growth.

Fed Chair Jerome Powell said on Wednesday a recession was “certainly a possibility,” reflecting fears in financial markets that the Fed’s tightening pace will throttle growth.

The Fed chief also testedified on Thursday before the House of Representatives, reiterating its commitment to fight inflation.

“As long as there is a debate over whether a recession will happen, there will be downward swings for the stock market that will ultimately boost the buck as a safe haven,” said Juan Perez, director of trading at Monex USA in Washington.

Since the beginning of the year amid the turmoil over Ukraine and the slide on Wall Street, with the S&P 500 down 20 per cent, the dollar index has gained 9 per cent.

“President Joe Biden sounded positive in the face of challenges a la Fed Chairman Jerome Powell. A recession isn’t in their minds and should not necessarily be the conclusion the public should reach following promises to contract monetary policy,” Perez added.

Against the yen, the dollar dropped 1 per cent to 134.84 yen, retreating further away from a 24-year high hit earlier this week.

US data showed that the number of Americans filing new claims for unemployment benefits edged down last week as labor market conditions remained tight, though a slowdown is emerging.

Initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 229,000 for the week ended June 18. Economists polled by Reuters had forecast 227,000 applications for the latest week. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March.

The dollar index slipped following the US data.

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Currency bid prices at 10:57AM (1457 GMT)

Description RIC Last US Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.2400 104.2200 +0.03 per cent 8.966 per cent +104.7800 +104.0500

Euro/Dollar $1.0531 $1.0569 -0.35 per cent -7.37 per cent +$1.0581 +$1.0484

Dollar/Yen 134.4350 136.2100 -1.30 per cent +16.79 per cent +136.2000 +134.2650

Euro/Yen 141.56 143.94 -1.65 per cent +8.62 per cent +143.9800 +141.4200

Dollar/Swiss 0.9575 0.9617 -0.42 per cent +4.99 per cent +0.9678 +0.9568

Sterling/Dollar $1.2271 $1.2265 +0.04 per cent -9.27 per cent +$1.2294 +$1.2171

Dollar/Canadian 1.2962 1.2947 +0.13 per cent +2.53 per cent +1.2987 +1.2937

Aussie/Dollar $0.6917 $0.6924 -0.09 per cent -4.84 per cent +$0.6928 +$0.6870

Euro/Swiss 1.0084 1.0159 -0.74 per cent -2.75 per cent +1.0165 +1.0069

Euro/Sterling 0.8580 0.8615 -0.41 per cent +2.14 per cent +0.8641 +0.8575

NZ $0.6300 $0.6286 +0.24 per cent -7.95 per cent +$0.6310 +$0.6249

Dollar/Dollar

Dollar/Norway 9.9480 9.9045 +0.63 per cent +13.13 per cent +10.0200 +9.8980

Euro/Norway 10.4785 10.4694 +0.09 per cent +4.65 per cent +10.5295 +10.4415

Dollar/Sweden 10.1708 10.0944 +0.41 per cent +12.78 per cent +10.2077 +10.0812

Euro/Sweden 10.7133 10.6697 +0.41 per cent +4.68 per cent +10.7283 +10.6605