THE US dollar fell on Thursday (Feb 22) as share markets hitting record highs drove optimism across asset classes and traders digested a slew of largely better-than-expected business activity surveys, looking for implications for interest rates.

Flash Purchasing Managers’ Index (PMI) figures showed the downturn in eurozone business activity eased in February as the dominant services sector broke a six-month streak of contraction, offsetting a deterioration in manufacturing.

The euro was last up 0.3 per cent at US$1.0851, having risen more than 0.5 per cent to its highest in nearly three weeks after stronger-than-expected French activity data, before dropping back after disappointing German data.

Sterling was up 0.3 per cent at US$1.2674 after British PMI data showed the economy kept up its early 2024 momentum, while the yen was steady at 150.28 yen per dollar.

That left the US dollar index, which tracks the unit against six main peers, down 0.25 per cent at 103.67 and on track for a weekly fall of around 0.5 per cent, which, if sustained, would be its first weekly decline of 2024.

Broad optimism across markets was also weighing on the US dollar, which sometimes benefits from market nervousness. Japanese and European share benchmarks both hit record highs on Thursday, in the Nikkei’s case surpassing a peak reached back in 1989.

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Still, the US dollar index is up more than 2 per cent for the year as traders pare back aggressive bets for a slew of rate cuts by the Federal Reserve this year.

“The US dollar has come a long way, and the market is taking a breath and doesn’t want to put on more dollar longs at this point,” said Jane Foley, head of FX strategy at Rabobank.

“What could potentially change that is if we have a further build-up of that debate about US interest rates, and whether June (for the first rate cut) is realistic. The next round of US data is going to be instrumental.”

“We continue to think that the US dollar will get a second wind.”

The risk-sensitive Australian dollar was up 0.4 per cent at US$0.6580 and also hit a three-week high, though the traditional safe-haven Swiss franc also strengthened, with the US dollar down 0.15 per cent at 0.8779 francs.

Minutes of the Fed’s latest policy meeting released on Wednesday reinforced the message that the central bank is in no hurry to ease rates.

Traders are currently pricing in just about a 30 per cent chance that the Fed could begin easing rates in May, much lower than a more than over 80 per cent chance a month ago, according to the CME FedWatch Tool.

That has followed recent data which showed US producer prices and consumer prices rising more than expected in January, alongside persistent strength in the country’s labour market.

Elsewhere, the New Zealand dollar hit a more than one-month high of US$0.6218.

The Reserve Bank of New Zealand (RBNZ) meets next week, and while economists generally expect the bank to hold the cash rate at 5.5 per cent, some see a risk of a hike, which has given some support to the kiwi.

“If there is a hike from New Zealand, the market is going to be focused on the argument: ‘New Zealand has weak data and is still hiking. The Fed’s got resilient data, so how are they going to be cutting?,” Foley said. REUTERS