Dollar stumbles as markets rethink interest rate path


U.S. dollar banknotes are displayed in this illustration taken February 14, 2022. REUTERS/Dado Ruvic

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LONDON, June 24 (Reuters) – The U.S. dollar skidded on Friday and headed for its first weekly decline of June as traders cut bets on where interest rates could peak and brought forward the timing rate cuts to counter a possible recession.

An important change 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 greenback against major currencies.

As of 0920 GMT, the dollar index, which measures the greenback against six major currencies, was slightly lower at 104.20. It rose 0.2% on Thursday, mainly due to a drop in the euro after weak data on business activity reduced bets on European Central Bank tightening.

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The dollar, up 9% this year, has lost some of its shine since investors began betting that the Fed could slow the pace of rate tightening after another 75 basis point hike in July, and could begin to ease its policy after March 2023.

Fed Governor Michelle Bowman said she supported 50 basis point hikes for “the next” meetings after the July one.

However, Fed Chairman Jerome Powell, in his second day of congressional testimony on Thursday, stressed the “unconditional” commitment to controlling inflation, even amid risks to growth. Read more

The repricing of the rate hike sent 10-year Treasury yields to two-week lows while the dollar index lost 0.4% this week.

Analysts, however, noted that the revision of terminal rates was happening in the developed world as fears of recession grew.

“Market price revision … has held the dollar back, but an offsetting force is the risk of a global slowdown. The Fed is pretty much on autopilot, until it releases the brakes, weakness of the dollar will be limited,” BMO Capital Markets Strategist Stephen Gallo said.

“Rate hikes are also being removed from the euro and pound markets.”

The yen, sensitive to swings in US yields, rose 0.1% around 134.9 and was on course to break a three-week losing streak in which it fell to successive 24-year lows. over 136.

“If US Treasury yields peaked, so did dollar/yen. If you combine better Japanese GDP growth and a spike in US yields, it’s a benign environment for yen strength,” the economist said. Mizuho principal Colin Asher, who expects around 130 yen per year. end.

The euro rose 0.2%, after Thursday’s 0.44% plunge that was triggered by weaker-than-expected PMI figures for June and Germany’s decision to trigger the ‘alarm phase’ of his emergency gas plan

For the week however, the euro is up 0.5% against the dollar.

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, edged up 0.4% .

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Editing by Dhara Ranasinghe

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