Euro's post Fed glow fades on bleak German industrial orders

THE euro pulled back from a 1-week high against the US dollar on Thursday (May 5) after German industrial orders fell more than expected in March, signalling Europe was facing growing headwinds from the war in Ukraine.

The US dollar had weakened after the Fed raised interest rates by 50 basis points. Hedge funds trimmed extended long positions after Fed chair Jerome Powell told reporters later that policymakers were not actively considering 75-basis-point moves in the future.

But the US currency saw some fresh demand in London trading after Germany reported that industrial orders in March suffered their biggest monthly drop since last October.

While pressure grows on global policymakers to rein in surging inflation, the German data raises questions how quickly can the European Central Bank (ECB) afford to tighten policy without choking economic growth. Money markets expect an ECB interest rate hike as early as July.

“The German data was dreadful and the dollar is regaining some lost ground,” said a trader at a European bank.

The US dollar index slid 0.9 per cent from near a 2-decade high to 102.450 in the wake of the Fed decision, but was up 0.4 per cent in early London trading at 102.82.

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The single currency, which briefly climbed to a 1-week high of US$1.0639 on Thursday, ceded gains and fell 0.2 per cent to US$1.06020. It matched an early 2017 low of US$1.0470 last month.

Expectations of a hawkish Fed have weighed heavily on markets this year and powered the US dollar higher. It is up more than 7 per cent so far this year against a basket of other major currencies, on track for its biggest annual gains since 2015.

But with its index now around 103, investors are wondering whether the greenback has legs to rise more than 15 per cent to its 2002 highs or fall back by a similar margin to the lows of 2017 and 2020.

“The only thing that can change the outlook of a broadly stronger dollar is a weakening of the US economy,” said Kenneth Broux, a currency strategist at Societe Generale in London.

Sterling fell more than 0.5 per cent to US$1.2561 before a Bank of England (BOE) meeting where traders have fully priced a 25 basis-point rate hike. REUTERS