Euro slips as Germany enters recession, dollar hits 2-month peak

Reuters

London, May 25

The euro dropped on Thursday as Europe’s largest economy Germany was confirmed to be in a recession, while the dollar hit a two-month peak, benefitting from safe-haven demand as worries mounted about a US default.

The latest concern was raised by ratings agency Fitch, who put the United States’ “AAA” debt ratings on negative watch, a precursor to a possible downgrade should lawmakers fail to agree to raise the debt limit.

The greenback has paradoxically benefited from demand for safe havens with only a week left for a resolution to slow-moving debt ceiling talks before the June 1 “X-date”, when the Treasury has warned it will be unable to pay all its bills.

“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 US dollar index, which measures the currency against six major peers and is heavily weighted towards the euro, rose as much as 0.3% to 104.16, the highest since March 17.

The euro slipped about 0.2%, enough to refresh a two-month low at $1.0715.

Sterling eased 0.1%, after briefly hitting its weakest since April 3 at $1.2332.

Against the yen, the dollar edged to its strongest since Nov. 30 at 139.705, although was last down 0.1% at 139.345.

The US currency has also been supported by a paring of bets for Federal Reserve rate cuts this year, with the economy proving resilient to the effects of the central bank’s aggressive tightening campaign until now.

US money market traders have trimmed expectations for Fed rate cuts this year to just a quarter point in December, from as much as 75 basis points previously.

They have also ramped up odds for another quarter-point hike in June back to about 1-in-3, after several Fed officials struck hawkish postures recently with consumer inflation still running about twice the 2% target, and the minutes from the latest meeting showing “almost all” policymakers saw upside risks to inflation.

“The market had been very aggressive pricing in rate cuts from the Fed this year. That has changed over the course of the last two weeks which is dollar supportive,” Danske Bank’s Mellin said.

The Chinese yuan renewed a six-month low, dropping to 7.0903 per dollar in the offshore market.

The Asian giant has produced a cascade of disappointing economic indicators, all pointing to dull consumer demand and suggesting a post-pandemic recovery has already run its course.

“The PBoC (People’s Bank of China) showed little intention to defend the (yuan),” Ken Cheung, chief Asian FX strategist at Mizuho Bank, wrote in a client note.

He expected the yuan to remain under pressure until the country’s economic data shows improvement or the PBoC takes policy action to stabilise the currency market.

Australia’s dollar has felt the impact of China’s economic weakness acutely due to its close trade ties, slipping to a 6 ½-month low of $0.6523.

The New Zealand dollar was still reeling from the central bank’s shock dovish tilt on Wednesday, which triggered a 2.2% slide. It slid a further 0.4% to hit its lowest since mid-November at $0.6077.