Dollar stumbles as markets rethink interest rate path

US dollar banknotes are shown in this image, taken Feb. 14, 2022. REUTERS/Dado Ruvic

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LONDON, June 24 (Reuters) – The US dollar fell Friday and entered its first weekly decline this month, as traders placed bets on where interest rates could peak and expressed their views on the timing of rate cuts to identify a possible recession.

A key factor this week has been the decline in oil and commodity prices, which has allayed inflation fears and allowed stock markets to recover. This has eroded the safe-haven bid that has boosted the dollar against major currencies.

By 1045 GMT, the dollar index, which measures the greenback against six major currencies, fell 0.2% to 104.22. That reversed a 0.2% gain on Thursday, mainly driven by a decline in the euro after weak data on business activity reduced bets on tightening by the European Central Bank.

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The dollar, which is up 9% this year, has lost some of its luster since investors started betting that the Fed could slow the pace of rate tightening, following a fresh 75 basis point gain in July. They now see interest rates peaking at around 3.5% in March next year and falling nearly 20 basis points by July 2023. Read more .

This rate hike brought 10-year government bond yields to their lowest level in two weeks, while the dollar index lost 0.4% this week.

For now, however, Fed Chair Jerome Powell emphasized the central bank’s “unconditional” commitment to contain inflation. Read more . Fed Governor Michelle Bowman also backed increases of 50 basis points for “coming” meetings after July. Read more .

Analysts also noted that there has been a re-pricing of terminal rates in the developed world as fears of a recession mount.

“The price reversal in the market…has held back the dollar, but one compensating force is the risk of a global downturn. The Fed is pretty much on autopilot. Until they take their foot off the brakes, dollar weakness will limited,” says BMO Capital Markets strategist Stephen Gallo.

“Rate hikes are also being pulled from the euro and sterling markets,” he noted.

The yen, which is sensitive to changes in US interest rates, rose 0.1% at around 134.9 per dollar and was set to experience a three-week loss streak before falling to consecutive 24-year lows after 136.

“When US Treasury yields have peaked, so will the dollar/yen. If you combine better Japanese GDP growth with a spike in US yields, it’s a favorable environment for the strength of the yen,” says Colin Asher, senior economist at Mizuho, ​​who expects a yen to be around 130 a year. -end.

The euro rose 0.2%, after Thursday’s 0.4% drop, driven by weaker-than-expected June PMI data and Germany, which initiated the “alarm phase” of its emergency gas plan. Read more .

The dollar’s decline even boosted commodity-oriented currencies such as the Australian dollar and Norwegian krone. The Aussie was up 0.14% to $0.6904, though it remained on track for a third consecutive weekly decline.

The Norwegian krone, fresh off Thursday’s 50bp rate hike, gained 0.9% and rose 0.5% against the euro.

The euro also fell 0.25% against the Swiss franc to stay just outside the February low on Thursday.

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Additional coverage by Kevin Buckland in Tokyo; Editing by Dhara Ranasinghe and Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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