U.S. dollar slumps as data continues to show slowdown; yen rises

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar slid on Thursday in choppy trading, as a slew of data continued to show that the U.S. economy was slowing down in the wake of multiple hefty interest rate hikes from the Federal Reserve, with the market anticipating a pause in tightening this year.

“The market is just one-way right now: short dollars and long bonds. It’s going to take some time to change that direction because the current data flow is not favorable to the Fed’s stance that rates are going to stay higher for longer,” said Mazen Issa, senior FX strategist at TD Securities in New York.

“That may be what ends up happening. But it’s harder for the Fed’s message to resonate for markets after so much tightening has been done and also what the data flow has shown.”

The yen, on the other hand, rallied due in part to expectations that the Bank of Japan (BOJ) will eventually shift away from ultra-loose monetary policy.

In the United States, Thursday’s data showed overall housing starts declined 1.4% to a rate of 1.382 million units last month. Building permits dropped as well, down 1.6% to a rate of 1.330 million units.

Manufacturing activity in the Mid-Atlantic region softened as well in January. The Philadelphia Fed’s monthly manufacturing index rose to negative 8.9 this month, from negative 13.7 in December, an improvement from the median estimate of negative 11.

The survey also showed inflation pressures. The latter — measured by the prices paid index — dropped to 24.5 in January from 36.3 last month. That was the lowest in nearly 2-1/2 years.

However, initial claims for state unemployment benefits dropped 15,000 to 190,000 for the week ended Jan. 14. Economists polled by Reuters had forecast 214,000 claims for the latest week.

In afternoon trading, the dollar fell 0.4% against the yen to 128.455 yen, a day after the BOJ’s decision to stand pat on its ultra-loose monetary policy.

The rebound in the yen also reflects “the fact that market participants are still speculating (on) a shift in the Bank of Japan’s policy,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.

The euro rose 0.4% against the dollar to $1.0831. It hit a nine-month high of $1.089 on Wednesday.

European Central Bank President Christine Lagarde on Thursday said inflation is far too high and the ECB will keep raising interest rates.

“We shall stay the course until such a time when we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner,” she said in a panel discussion during the World Economic Forum in Davos, Switzerland.

The dollar index, which measures the U.S. currency’s value against a basket of peers, was last up 0.3% at 102.04.

Fed officials were in full force once again on Thursday to reinforce their message on rates. Boston Fed President Susan Collins said the Fed will probably need to raise interest rates to “just above” 5% and then hold them there for a period.

Fed Vice Chair Lael Brainard, for her part, said despite the recent moderation in inflation, it remains high and “policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.”

The Australian dollar slumped 0.4% to US$0.6916, further pressured by a surprise dip in Australian employment in December.

The New Zealand dollar also fell, down 0.7% at US$0.64, after New Zealand Prime Minister Jacinda Ardern on Thursday made a surprise announcement that she would step down no later than early February and not seek reelection.

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Currency bid prices at 3:02PM (2002 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 102.0400 102.3300 -0.27% -1.401% +102.4800 +102.0100

Euro/Dollar $1.0831 $1.0795 +0.33% +1.08% +$1.0839 +$1.0782

Dollar/Yen 128.4500 128.9400 -0.36% -2.01% +128.8500 +127.7700

Euro/Yen 139.14 139.16 -0.01% -0.83% +139.4200 +137.9200

Dollar/Swiss 0.9152 0.9166 -0.14% -1.01% +0.9189 +0.9149

Sterling/Dollar $1.2392 $1.2349 +0.34% +2.46% +$1.2394 +$1.2314

Dollar/Canadian 1.3453 1.3493 -0.29% -0.70% +1.3520 +1.3448

Aussie/Dollar $0.6920 $0.6941 -0.29% +1.53% +$0.6948 +$0.6872

Euro/Swiss 0.9913 0.9888 +0.25% +0.18% +0.9931 +0.9885

Euro/Sterling 0.8738 0.8743 -0.06% -1.20% +0.8787 +0.8723

NZ $0.6397 $0.6445 -0.70% +0.80% +$0.6449 +$0.6369

Dollar/Dollar

Dollar/Norway 9.8865 9.9220 -0.27% +0.83% +9.9650 +9.8925

Euro/Norway 10.7149 10.6878 +0.25% +2.11% +10.7683 +10.6900

Dollar/Sweden 10.3099 10.3337 +0.12% -0.94% +10.3800 +10.2520

Euro/Sweden 11.1671 11.1539 +0.12% +0.16% +11.2017 +11.0968

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Harry Robertson in London and Rae Wee in Singapore; Editing by Gerry Doyle, Kim Coghill, Sharon Singleton and Jonathan Oatis)