US dollar stumbles as markets rethink interest rate path

THE US dollar slipped on Friday (Jun 24) and was heading for its first weekly decline this month as traders dialled down bets on where interest rates may peak and brought forward their views on the timing of rate cuts to counter a possible recession.

A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the US dollar against major currencies.

By 1045 GMT, the US dollar index, which measures the greenback against 6 major currencies, slipped 0.2 per cent at 104.22. That reversed a 0.2 per cent rise on Thursday, mostly driven by a euro decline after weak business activity data reduced bets for European Central Bank tightening.

The US dollar, up 9 per cent this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5 per cent and falling by nearly 20 bps by July 2023.

This rate hike repricing sent 10-year Treasury yields to 2-week lows, while the US dollar index has lost 0.4 per cent this week.

For now though, Fed chair Jerome Powell stressed the central bank's "unconditional" commitment to taming inflation. Fed governor Michelle Bowman too supported 50 bps hikes for "the next few" meetings after July.

Analysts noted also that terminal rate repricing was happening across the developed world as recession fears grow.

"The repricing in the market...has held the US dollar back but an offsetting force is the risk of a global downturn. The Fed is pretty much on autopilot. Until they take their foot off the brakes, US dollar weakness will be limited," BMO Capital Markets strategist Stephen Gallo said.

"Rate hikes are being taken out of the euro and sterling markets too," he noted.

The yen, sensitive to changes in US yields, was up 0.1 per cent around 134.9 per US dollar and set to snap a 3-week losing streak during which it tumbled to successive 24-year lows beyond 136.

"If US Treasury yields have peaked, so has US dollar/yen. If you combine better Japanese GDP growth and a peak in US yields it's a benign environment for yen strength," said Mizuho senior economist Colin Asher, who expects yen around 130 by year-end.

The euro ticked up 0.2 per cent, following Thursday's 0.4 per cent tumble triggered by weaker-than-expected PMI figures for June and Germany triggering the "alarm stage" of its emergency gas plan.

The greenback's slide boosted even commodity-focused currencies such as Australian dollar and Norwegian crown. The Aussie ticked up 0.14 per cent to US$0.6904, though it remained on track for a third straight weekly decline.

The Norwegian crown, fresh off Thursday's 50 bps rate hike, gained 0.9 per cent and rose 0.5 per cent against the euro.

The euro also slipped 0.25 per cent against the Swiss franc to stand just off the February low hit on Thursday. REUTERS