The euro fell after the bloc’s business growth virtually stalled this month, as the dollar drew support from a bout of risk aversion on Friday and hawkish comments from global central banks, including the Federal Reserve.
The dollar index , which measures the currency against six others, was up 0.56% at 102.95, reversing three straight weeks of losses. The euro slid 0.85% to $1.0859, heading for its biggest one-day fall since March.
The latest data showed euro zone business growth virtually stalled in June. A downturn in manufacturing deepened, while activity in the bloc’s dominant services sector barely expanded, as overall demand fell for the first time since January.
Business activity in Germany slowed in June as growth in the services sector decelerated and a decline in manufacturing worsened, while French business activity also contracted this month for the first time in five months.
Sterling struggled to hold gains from a larger-than-expected 50-basis-point rate rise from the Bank of England (BoE) on Thursday in response to sticky inflation, fuelling fears about an impending recession in the UK.
While higher rates are typically supportive of currencies, the risk that they will trigger an economic downturn has pushed some investors to seek safe-haven assets including the U.S. dollar.
The pound fell 0.31% to $1.2710 and was on track for a weekly loss of nearly 1%, snapping three straight weeks of gains.
“With the Bank of England set to raise rates substantially further, we expect the UK economy to come under renewed pressure by late 2023, and look for growth to either stagnate or even for the economy to contract,” said Nick Bennenbroek, international economist at Wells Fargo.
The Australian and New Zealand dollars also struggled in Asia trade as risk appetite waned.
The Aussie fell 1% to $0.6688 and was headed for a weekly loss of more than 2.5%, its worst week since March. The kiwi slid 0.58% to $0.6141, down about 1.5% for the week.
Rate hike surprises and hawkish comments from central banks globally have renewed market fears that policymakers have further to go in tightening policy to tame inflation, even at the risk of tipping their economies into a recession.
Norway’s central bank on Thursday also stunned markets with a 50-bp rate hike and said it aimed for another hike in August. The Swiss National Bank raised its policy interest rate by 25 bps the same day and signalled more tightening to come.
“Markets are definitely taken by surprise by the recent, more aggressive actions that some central banks had to take,” said Khoon Goh, head of Asia research at ANZ.
“Also putting into question the following trend of other central banks that initially looked like they’ve paused but went on to hike rates … so that’s something that markets are starting to become worried about again.”
The Reserve Bank of Australia and the Bank of Canada had earlier this month delivered surprise rate hikes when markets were leaning towards pauses.
Fed Chair Jerome Powell said on Thursday the central bank would move interest rates at a “careful pace” from here.
Money markets now see a 74% chance that the Fed will raise interest rates by 25 bps at its policy meeting next month, after leaving it unchanged last week.
THE YEN
The yen was largely steady at 143.05, languishing near an over seven-month low of 143.23 per dollar hit in the previous session.
The Japanese currency has come under renewed pressure as the Bank of Japan (BOJ) maintains an ultra-dovish stance.
Data out on Friday showed that Japan’s core consumer inflation exceeded forecasts in May and an index excluding fuel costs rose at the fastest annual pace in 42 years, putting pressure on the BOJ to phase out its massive stimulus.
Markets in China were closed for a holiday on Friday.
