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 slumped Friday, heading into its first weekly drop of June as traders bet on where interest rates might peak and put forward the timing of rate cuts to avoid a possible recession to counteract.

A major shift 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, which boosted the greenback against major currencies.

By 0920 GMT, the dollar index, which measures the greenback against six major currencies, was modestly lower at 104.20. It rose 0.2% on Thursday, mainly due to a decline in the euro after weak data on business activity reduced bets on a tightening by the European Central Bank.

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The dollar, which is up 9% this year, has lost some of its luster as investors began betting that the Fed could slow the pace of rate tightening after another 75 basis point gains in July, and possibly after March 2023. policy would ease.

Fed Governor Michelle Bowman said she supports a 50 basis point increase for “the next few” meetings after July.

However, Fed Chair Jerome Powell emphasized an “unconditional” commitment to curb inflation even amid risks to growth during his second day of congress on Thursday. read more

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

Analysts noted, however, that there has been a re-pricing of terminal rates across 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 more or less on autopilot, until they take their foot off the brake, the weakness of the dollar will be limited,” BMO Capital Markets Strategist Stephen Gallo said.

“Interest increases are also being implemented in the euro and pound markets.”

The yen, which is sensitive to changes in US interest rates, rose 0.1% around 134.9 and was set to go through a three-week loss streak, falling to consecutive 24-year lows past 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.” said Colin Asher, senior economist at Mizuho, ​​who expects a yen to be around 130 a year. end.

The euro rose 0.2%, following Thursday’s 0.44% fall caused by weaker-than-expected June PMI data and Germany’s move to trigger the “alarm phase” of its emergency gas plan.

For the week, however, the euro is up 0.5% against the dollar.

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, rose 0.4%.

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Editing by Dhara Ranasinghe

Our Standards: The Thomson Reuters Trust Principles.

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