Dollar falls on recession fears

The US dollar fell against its major counterparts on Friday, anticipating its first weekly decline this month as investors continue to watch the Fed’s policy and whether a rate hike will trigger a recession.

The currency also lost support as market sentiment improved, pushing up regional equity markets and higher risk currencies such as the Australian and New Zealand dollars.

The dollar index in Asia fell 0.2% to 104.19. This offset the previous day’s 0.19% gain, which was driven largely by the euro’s weakness after weak European manufacturing data cut bets on European Central Bank tightening.

“Recession talk has upset the DXY uptrend, but we don’t think retracements have legs beyond the low 102s,” Westpac strategists wrote in a client note, referring to the dollar index.

“Fed Funds is set to rise above 3% by year’s end, so USD interest rate support should ultimately continue to build,” they added. “The ECB meanwhile is struggling to contain peripheral spreads and the Eurozone is facing more material stagflation hardship – hardly enticing.”

Dollar trading has been volatile this week and markets are now betting on more cautious Fed action following another expected 75 basis point rate hike in July. The dollar index fell 0.42% over this period.

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Fed chief Michelle Bowman said she supports a 50 basis point hike for the “the next few” meetings after July. Meanwhile, Fed Chairman Jerome Powell, in his second speech to Congress, stressed the central bank’s “unequivocal” commitment to curbing inflation even in the face of growth risks.

Recession fear halted Treasury yields overnight, pinning down support for the dollar, with 10-year yields falling to a two-week low.

Against the yen, which is highly sensitive to changes in US yields, the dollar slipped 0.2% to 134.66. For the week it fell by 0.25%.

The euro rose 0.22% to $1.05435 but after falling 0.44% overnight after weaker-than-expected German and French PMI data.

On Thursday, Germany also launched the “alarm stage” of its emergency gas plan in response to cuts in supplies from Russia.

“There have been a couple of factors there which have really added up, which have really started to question how far the ECB will be able to get into its tightening.”

However, for the week, the euro remains up 0.52% against the dollar.

The pound rose 0.14% to $1.22785, leading to a weekly gain of 0.48%.

The Aussie rose 0.28% to $0.6914 but was still set for a weekly decline of 0.32%, its third losing week in a row. The New Zealand dollar gained 0.4% to $0.6302, narrowing its weekly loss to 0.19%.