The biggest economy in Europe, Germany, was officially declared to be in a recession on Thursday, which caused the euro to fall. Meanwhile, the dollar reached a two-month high as demand for safe-haven assets increased amid growing concerns about a US default.
Fitch, a rating agency, recently expressed its latest concern by placing the United States’ “AAA” debt ratings on “negative watch,” which signals the possibility of a downgrade should Congress be unable to reach an agreement to raise the debt ceiling.
With only one week left until the June 1 “X-date,” when the Treasury has warned it won’t be able to pay all its obligations, a resolution to the sluggish debt ceiling talks has ironically helped the dollar.
“It has been risk-off this week and that has benefitted the dollar generally,” said Stefan Mellin, senior analyst at Danske Bank.
Escalating signs of economic malaise in Europe sent the euro to multi-month lows against the dollar.
The latest sign of weakness out of Europe came from Germany, where the economy contracted slightly in the first quarter, and thereby was in recession after negative growth in the fourth quarter of 2022.
“We have seen some divergent cross-Atlantic macro data this week and while Germany is not the euro, the momentum in the economy is stunningly weak,” Danske Bank’s Mellin said, also noting this week’s Ifo and PMI data.
The U.S. dollar index increased as much as 0.3% to 104.16, the highest level since March 17, when it was measured against six significant rivals. The index substantially favors the euro.
The euro lost 0.2%, which was sufficient to bring it back to a two-month low of $1.0715.
After temporarily falling to its lowest level since April 3 at $1.2332, the pound weakened by 0.1%.
The dollar nudged up to its best level against the yen since November 30 at 139.705, although it was last down 0.1% at 139.345.
A reduction in bets for Federal Reserve rate cuts this year has also helped to boost the US dollar, as the economy has so far resisted the consequences of the central bank’s aggressive tightening programme.
From as much as 75 basis points in the past, US money market traders have reduced their forecasts for Fed rate reduction this year to only a quarter point in December.
As consumer inflation is still running about twice the 2% target and the most recent meeting’s minutes show that “almost all” policymakers saw upside risks to inflation, they have also increased the odds for another quarter-point hike in June back to about 1-in-3.
“This year, the market was particularly aggressive in pricing in rate reduction from the Fed. That has changed during the past two weeks, which is positive for the dollar, according to Mellin of Danske Bank.
In the offshore market, the Chinese yuan once again hit a six-month low, falling to 7.0903 per dollar.
A string of unimpressive economic indicators from the Asian behemoth point to sluggish consumer demand and indicate that the post-pandemic recovery has already peaked.
Ken Cheung, the chief Asian FX analyst at Mizuho Bank, stated in a client note that “the PBoC (People’s Bank of China) showed little intention to defend the (yuan)”.
He anticipated that until the nation’s economic figures indicate improvement or the PBoC takes measures to stabilize the currency market, the yuan would stay under pressure.
Due to its tight trade relations, Australia’s dollar has been particularly affected by China’s economic instability, falling to a 6 1/2-month low of $0.6523.
After the central bank’s shocking dovish tack on Wednesday, which precipitated a 2.2% decline, the New Zealand currency was still reeling. It dropped another 0.4% to $0.6077, its lowest level since mid-November.
