Euro lower as Germany enters recession, US dollar scales 2-month peak

THE euro fell on Thursday (May 25) as Europe’s largest economy Germany was confirmed to be in a recession, while the US dollar hit a two-month peak, benefitting from safe-haven demand as worries mounted about a US default.

The latest concern was raised by Fitch, which put the US’ “AAA” debt ratings on negative watch, a precursor to a possible downgrade should lawmakers fail to agree to raise the US$31.4 trillion debt ceiling.

The greenback has benefited from demand for safe havens with only a week left for a resolution to debt ceiling talks before the Jun 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 US dollar generally,” said Stefan Mellin, senior analyst at Danske Bank.

Escalating signs of economic malaise in Europe, meanwhile, sent the euro lower against the US dollar.

The latest sign of weakness came from Germany, where the economy contracted slightly in the first quarter, and so 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 including the euro, rose as much as 0.3 per cent to 104.16, the highest since Mar 17.

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

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Sterling eased 0.1 per cent, after briefly hitting its weakest since Apr 3 at US$1.2332.

Against the yen, the US dollar edged to its strongest since Nov 30 at 139.705.

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

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 sounded hawkish recently, and the minutes from the Fed’s latest meeting showed “almost all” policymakers saw upside risks to inflation.

“The major drivers at the moment are global risk aversion ... and the repricing along the US forward curve,” said UniCredit FX strategist Roberto Mialich.

“Both are keeping the USD sharp on bid and will probably prevent a complete reversal of the current USD strength even if a (debt ceiling) deal is struck and risk appetite resumes,” he added.

The Chinese yuan renewed a six-month low, dropping to 7.0903 per US dollar in the offshore market, after recent economic indicators pointed to dull consumer demand and suggested the post-pandemic recovery has already run its course.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, expects the yuan to remain under pressure until China’s economic data shows improvement or the People’s Bank of China takes policy action to stabilise the currency market.

Australia’s dollar has felt the impact of China’s economic weakness acutely due to close trade ties, slipping to a 6 1/2-month low of US$0.6520.

The New Zealand dollar was still reeling from the central bank’s shock dovish tilt on Wednesday, which triggered a 2.2 per cent slide. It slid a further 0.5 per cent to hit its lowest since mid-November at US$0.6069. REUTERS