Dollar pares gains as US growth contracts for second quarter

NEW YORK: The dollar pared gains on Thursday after data showed that the US economy contracted again in the second quarter, fueling speculation that the Federal Reserve will not raise rates as high as previously expected.

Gross domestic product fell at a 0.9% annualized rate last quarter, the Commerce Department said in its advance estimate of GDP on Thursday. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.

The second straight quarterly decline in GDP meets the standard definition of a recession. It comes as the Fed aggressively hikes rates in an attempt to choke off soaring inflation.

“For now the market is running with the idea that slowing growth will cause the Fed to blink and that we’re entering a recession,” said Mazen Issa, senior FX strategist at TD Securities in New York.

However, “the challenge here is that in order to get a weak dollar you need a strong euro and that is not going to happen given the headwinds facing Europe.”

The greenback had dipped on Wednesday after the US central bank raised interest rates by 75 basis points, as was widely anticipated, while comments from Fed Chair Jerome Powell spurred hopes for a slower hiking path.

It bounced back earlier on Thursday, however, as investors continued to digest Powell’s comments.

“Yesterday’s long-squeeze is not a sign of a longer-lasting soft period for the dollar, in our view. Upside risks for the greenback remain material due to an unstable global risk environment and still broadly supportive Fed stance,” ING FX strategists Francesco Pesole and Frantisek Taborsky said in a note on Thursday.

The dollar index against a basket of major currencies was last at 106.45, up 0.09% on the day, after earlier reaching 106.98. It has fallen from 109.29 on July 14, which was the highest since September 2002.

The dollar dropped sharply against the Japanese currency to 134.57 yen, down 1.51% on the day, as traders pared back how high the Fed will ultimately hike rates.

“Essentially dollar/yen is a reflection of the Fed terminal rate and that is being revised lower by markets at the moment,” said TD’s Issa.

Fed funds futures traders are now pricing for the Fed’s benchmark rate to peak at 3.24% in December, compared with previous expectations of a top of 3.39% in February, which was priced in on Monday.

The euro fell 0.37% to $1.0161 It traded as low as $0.9952 on July 14, the weakest since December 2002.

The single currency has been hurt by concerns about the region’s energy crisis.

“Problems for other currencies just keep on growing, most notably in Europe, where rising fears over gas and energy shortages are continuing to weigh on the euro and threatening the ability of the (European Central Bank) to tighten policy as much as it might otherwise wish to do so,” said Stuart Cole, chief macro strategist at Equiti Capital in London.