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Dollar falls to 3-week lows on US recession fears

U.S. markets are now fully pricing in a half percentage point cut at the Federal Reserve’s next meeting in March to 2.50 percent and factor in a small chance of a bigger 75 basis points reduction.

That would add to an unusually aggressive 125 basis points of cuts in January as the Fed tries to stave off a recession in the world’s biggest economy.

“This is a little bit of an extension of the dollar selling that started yesterday when we got the Philadelphia Fed data,” said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto.

The Philadelphia Fed said on Thursday its business index fell to minus 24 in February, its deepest contraction in activity since 2001, shocking many economists who had forecast minus 11.

“We need to get above $1.4875 now to see the next wave of euro buying. After $1.4875, I think markets are going to be keen on $1.50,” Butler said.

The euro got a boost earlier in the session after euro-zone services PMI index rose to 52.3 in February from 50.6 the previous month, rising further from the 50 level which distinguishes between contraction and growth. The data dampened expectations of near-term interest rate cuts from the European Central Bank.

The euro rose to a three-week high of $1.4861 in the wake of the PMI data, before trading down to $1.4839, still up 0.2 percent on the day.

Investors now see less than a 50 percent chance of an ECB rate cut by July, compared to pricing in almost two cuts on that time horizon two weeks ago.

“The composite PMI points to (euro zone) GDP growth of 1.25 percent,” said Danske Bank in a research note.

“This number means that the ECB will continue to be sidelined for now, especially given the bad news ... on the inflation front with higher energy and food prices and the wage deals in Germany coming in high,” it added.

The rise in the euro dragged down the dollar index to near a three-week low of 75.357. The index last traded at 75.508, down 0.1 percent on the day.

The dollar fell 0.1 percent to 107.15 yen, while the euro was slightly higher versus the Japanese currency at 159.04 yen.

The yen shrugged off news that the Japanese government had lowered its assessment of the economy.

The Australian dollar was again one of the best performing currencies of the day, hitting its highest level since November at US$0.9250. The currency, which last traded at US$0.9223, is being supported by expectations that Australian interest rates could rise further from an already high 7.0 percent.

It has also benefited from a surge in metal prices such as gold, which the country exports, as well as a partial revival of carry trades, in which investors borrow funds in the low-yielding Japanese currency to buy higher-yielding assets.

The New Zealand dollar, with interest rates at 8.25 percent, rose to seven-month highs at US$0.8075. It last traded at US$0.8050.