Ray V and Alan John
LONDON/SINGAPORE (Reuters) – The dollar fell on Thursday as stock markets hit record highs, fueled optimism across asset classes and traders digested a slew of business activity surveys that were mostly better than expected as they looked for implications for interest rates.
Purchasing Managers’ Index (PMI) data showed the euro zone contraction in business activity slowed in February as the dominant services sector snapped a six-month losing streak to offset a deterioration in manufacturing.
The euro was last up 0.3% at $1.0851, rising more than 0.5% to its highest level in nearly three weeks after stronger-than-expected economic activity data in France, before falling after disappointing data for Germany.
Sterling rose 0.3% to $1.2674 after British PMI data showed the economy maintained its early 2024 momentum, while the yen held steady at 150.28 yen to the dollar.
As a result, the index, which tracks the asset’s performance against six major peers, fell 0.25% to 103.67 and is on track for a weekly fall of about 0.5%, which if extended would be its first weekly decline in 2024.
Broad optimism in markets also weighed on the dollar, which sometimes benefits from market nervousness. Japanese and European stock indexes hit record highs on Thursday, surpassing peaks reached back in 1989.
However, the dollar index is up more than 2% for the year as traders backed away from aggressive bets on a big rate cut by the Federal Reserve this year.
US business activity data will be released later in the day.
“The dollar has come a long way and the market is taking a breath and is reluctant to take on new long positions in the dollar at the moment,” said Jane Foley, head of FX strategy at Rabobank.
“What could potentially change the situation is if we continue to have a debate about US interest rates and whether June (the first rate cut) is realistic. The next round of US data will be critical.”
“We continue to think that the dollar will get a second wind.”
The risk-sensitive Australian dollar rose 0.4% to $0.6580 and also hit a three-week high, although the traditional safe-haven Swiss franc also strengthened, with the dollar falling 0.15% to 0.8779 francs.
Minutes from the Federal Reserve’s latest meeting, released Wednesday, confirmed reports that the central bank is in no hurry to cut rates.
According to the CME FedWatch Tool, traders now estimate the likelihood of the Fed cutting rates in May at about 30%, much lower than the more than 80% chance a month ago.
This followed recent data that showed U.S. producer prices and consumer prices rose more than expected in January, along with continued strength in the country’s labor market.
Elsewhere, the New Zealand dollar hit a more than one-month high of $0.6218.
The Reserve Bank of New Zealand (RBNZ) meets next week and while economists generally expect the bank to keep interest rates at 5.5%, some see the risk of a hike, which has provided some support for the index.
“If New Zealand goes up, the market will be focused on the argument: ‘New Zealand has weak data and is still growing. The Fed has solid data, so how are they going to cut?” Foley said.