Dollar Dips as Rally Peters Out, Most PMI Data Adds to Market Optimism

Dollar Dips as Rally Peters Out, Most PMI Data Adds to Market Optimism
U.S. dollar banknotes are seen in this illustration taken on March 10, 2023. (Dado Ruvic/Reuters)

LONDON/SINGAPORE—The dollar fell on Thursday as share markets hitting record highs drove optimism across asset classes and traders digested a slew of largely better-than-expected business activity surveys, looking for implications for interest rates.

Flash Purchasing Managers’ Index (PMI) figures showed the downturn in eurozone business activity eased in February as the dominant services sector broke a six-month streak of contraction, offsetting a deterioration in manufacturing.

The euro was last up 0.3 percent at $1.0851, having risen more than 0.5 percent to its highest in nearly three weeks after stronger than expected French activity data, before dropping back after disappointing German data.

Sterling was up 0.3 percent at $1.2674 after British PMI data showed the economy kept up its early 2024 momentum, while the yen was steady at 150.28 yen per dollar.

That left the dollar index, which tracks the unit against six main peers, down 0.25 percent at 103.67 and on track for a weekly fall of around 0.5 percent, which, if sustained, would be its first weekly decline of 2024.

Broad optimism across markets was also weighing on the dollar, which sometimes benefits from market nervousness. Japanese and European share benchmarks both hit record highs on Thursday, in the Nikkei’s case surpassing a peak reached back in 1989.

Still, the dollar index is up more than 2 percent for the year as traders pare back aggressive bets for a slew of rate cuts by the Federal Reserve this year.

U.S. business activity data is due later in the day.

“The dollar has come a long way, and the market is taking a breath and doesn’t want to put on more dollar longs at this point,” said Jane Foley, head of FX strategy at Rabobank.

“What could potentially change that is if we have a further build-up of that debate about U.S. interest rates, and whether June (for the first rate cut) is realistic. The next round of U.S. data is going to be instrumental.”

“We continue to think that the dollar will get a second wind.”

The risk-sensitive Australian dollar was up 0.4 percent at $0.6580 and also hit a three-week high, though the traditional safe-haven Swiss franc also strengthened, with the dollar down 0.15 percent at 0.8779 francs.

Minutes of the Fed’s latest policy meeting released on Wednesday reinforced the message that the central bank is in no hurry to ease rates.

Traders are currently pricing in just about a 30 percent chance that the Fed could begin easing rates in May, much lower than a more than over 80 percent chance a month ago, according to the CME FedWatch Tool.

That has followed recent data which showed U.S. producer prices and consumer prices rising more than expected in January, alongside persistent strength in the country’s labour 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 hold the cash rate at 5.5 percent, some see a risk of a hike, which has given some support to the kiwi.

“If there is a hike from New Zealand, the market is going to be focused on the argument: ‘New Zealand has weak data and is still hiking. The Fed’s got resilient data, so how are they going to be cutting?,” Ms. Foley said.

By Rae Wee and Alun John