FOREX Dollar crashes against yen, in line with Treasury yields, as US growth falls in Q2

  • Dollar posts biggest daily decline against yen since March 2020
  • US GDP contracts 0.9% in Q2
  • Fed funds futures push back rate hike expectations

NEW YORK, July 28 (Reuters) – The dollar fell to a six-week low against the yen on Thursday, following lower Treasury yields, after data showed the U.S. economy contracted again in the second quarter, fueling speculation that the Federal Reserve will not raise rates as aggressively as expected.

The greenback recorded its largest daily percentage decline against the yen since mid-March 2020. In the US Treasury market, two-year yields, which reflect interest rate expectations, fell at a three-week low. Since its high on Wednesday, the two-year yield has fallen 24 basis points.

Data showed Thursday that gross domestic product fell at an annualized rate of 0.9% in the second quarter. Consumer spending grew at its slowest pace in two years and business spending contracted, raising the risk that the economy is on the verge of a recession. Economists polled by Reuters had forecast GDP to rebound at a rate of 0.5%. Read more

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US Treasury Secretary Janet Yellen on Thursday did not rule out a possible recession, but refused to admit that a recession was underway after two quarters of contracting GDP – a shorthand definition often used by economists, journalists and market analysts. Read more

The data came a day after the Federal Reserve raised interest rates another 75 basis points to stamp out inflation.

The Fed’s action, coupled with earlier measures in March, May and June, pushed the central bank’s overnight interest rate from near zero to between 2.25% and 2 .50%. It is the fastest monetary policy tightening since former Fed Chairman Paul Volcker battled double-digit inflation in the 1980s. Read more

“Weak GDP is a clear signal of a slowing economy. We believe lower inflation will follow weaker growth,” said Vasily Serebriakov, FX strategist at UBS in New York.

“Once that happens, the market will see the end of the tightening cycle and it will likely hurt the dollar primarily against the yen, simply because it is the currency pair that follows US inflation and expectations the most. rate.” he added.

In afternoon trading, the dollar fell 1.7% to 134.22 yen after plunging earlier to a six-week low at 134.20 yen.

Fed funds futures traders on Thursday forecast a lower benchmark rate of 3.25% in December, down from 3.4% ahead of Wednesday’s Fed decision. The market also priced in just 92 basis points of cumulative tightening by the end of 2022, down from 108 basis points before Wednesday’s Fed announcement.

At the next Fed meeting in September, the rates market has priced in a 76% chance of a 50 basis point rate hike.

The greenback had plunged on Wednesday after the Fed’s 75 basis point rate hike was widely anticipated, while comments from Fed Chairman Jerome Powell raised hopes for a path slower hike.

Against a basket of major currencies, the dollar slipped 0.2% to 106.13 on Thursday. It fell from 109.29 on July 14, which was the highest since September 2002.

The Euro was last little changed at $1.0199. It was trading as low as $0.9952 on July 14, the lowest since December 2002, hurt by concerns over the region’s energy crisis.

“The lower Western Europe’s gas supply, the greater the risk of the bloc’s economy sliding into recession, a scenario that could limit the possibility for the ECB (European Central Bank) to increase rates to counter record inflation,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

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Currency rates at 4:45 p.m. (8:45 p.m. GMT)

(This story has been reclassified to correct the spelling of the analyst’s name in the 7th paragraph)

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Reporting by Karen Brettel and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Saikat Chatterjee in London; Editing by Nick Zieminski and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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