Dollar pares gains as US economic growth contracts for second quarter

The second straight quarterly decline in GDP meets the standard definition of a recession. It comes as the Fed aggressively hikes rates in an attempt to choke off soaring inflation.

us dollar
Photo: Paul Yeung/Bloomberg
Reuters NEW YORK
4 min read Last Updated : Jul 28 2022 | 8:30 PM IST

By Karen Brettell

NEW YORK (Reuters) - The dollar pared gains on Thursday after data showed that the U.S. economy contracted again in the second quarter, fueling speculation that the Federal Reserve will not raise rates as high as previously expected.

Gross domestic product fell at a 0.9% annualized rate last quarter, the Commerce Department said in its advance estimate of GDP on Thursday. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.

The second straight quarterly decline in GDP meets the standard definition of a recession. It comes as the Fed aggressively hikes rates in an attempt to choke off soaring inflation.

"For now the market is running with the idea that slowing growth will cause the Fed to blink and that we're entering a recession," said Mazen Issa, senior FX strategist at TD Securities in New York.

However, "the challenge here is that in order to get a weak dollar you need a strong euro and that is not going to happen given the headwinds facing Europe."

The greenback had dipped on Wednesday after the U.S. central bank raised interest rates by 75 basis points, as was widely anticipated, while comments from Fed Chair Jerome Powell spurred hopes for a slower hiking path.

It bounced back earlier on Thursday, however, as investors continued to digest Powell's comments.

"Yesterday's long-squeeze is not a sign of a longer-lasting soft period for the dollar, in our view. Upside risks for the greenback remain material due to an unstable global risk environment and still broadly supportive Fed stance," ING FX strategists Francesco Pesole and Frantisek Taborsky said in a note on Thursday.

The dollar index against a basket of major currencies was last at 106.45, up 0.09% on the day, after earlier reaching 106.98. It has fallen from 109.29 on July 14, which was the highest since September 2002.

The dollar dropped sharply against the Japanese currency to 134.57 yen, down 1.51% on the day, as traders pared back how high the Fed will ultimately hike rates.

"Essentially dollar/yen is a reflection of the Fed terminal rate and that is being revised lower by markets at the moment," said TD's Issa.

Fed funds futures traders are now pricing for the Fed's benchmark rate to peak at 3.24% in December, compared with previous expectations of a top of 3.39% in February, which was priced in on Monday.

The euro fell 0.37% to $1.0161 It traded as low as $0.9952 on July 14, the weakest since December 2002.

The single currency has been hurt by concerns about the region's energy crisis.

"Problems for other currencies just keep on growing, most notably in Europe, where rising fears over gas and energy shortages are continuing to weigh on the euro and threatening the ability of the (European Central Bank) to tighten policy as much as it might otherwise wish to do so," said Stuart Cole, chief macro strategist at Equiti Capital in London.

========================================================

Currency bid prices at 9:32AM (1332 GMT)

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

Previous Change

Session

Dollar index 106.4500 106.3600 +0.09% 11.276% +106.9800 +106.0500

Euro/Dollar $1.0161 $1.0199 -0.37% -10.62% +$1.0234 +$1.0114

Dollar/Yen 134.5650 136.6100 -1.51% +16.88% +136.5700 +134.3500

Euro/Yen 136.74 139.26 -1.81% +4.94% +139.3300 +136.6600

Dollar/Swiss 0.9568 0.9596 -0.29% +4.90% +0.9631 +0.9561

Sterling/Dollar $1.2150 $1.2158 -0.03% -10.13% +$1.2191 +$1.2105

Dollar/Canadian 1.2818 1.2824 -0.08% +1.35% +1.2839 +1.2795

Aussie/Dollar $0.6989 $0.6994 -0.06% -3.84% +$0.7013 +$0.6962

Euro/Swiss 0.9723 0.9786 -0.64% -6.23% +0.9805 +0.9720

Euro/Sterling 0.8360 0.8390 -0.36% -0.48% +0.8403 +0.8346

NZ $0.6284 $0.6261 +0.42% -8.15% +$0.6292 +$0.6252

Dollar/Dollar

Dollar/Norway 9.7430 9.7335 +0.14% +10.65% +9.7795 +9.6830

Euro/Norway 9.9053 9.9353 -0.30% -1.06% +9.9661 +9.8718

Dollar/Sweden 10.2784 10.2070 +0.22% +13.98% +10.3289 +10.1937

Euro/Sweden 10.4458 10.4224 +0.22% +2.07% +10.4585 +10.4135

 

(Additional reporting by Saikat Chatterjee in London; Editing by Alison Williams)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Subscribe to Business Standard digital and get complimentary access to The New York Times

Quarterly Starter

₹900

3 Months

₹300/Month

SAVE 25%

Smart Essential

₹2,700

1 Year

₹225/Month

Save 46%

Super Saver

₹3,900

2 Years

₹162/Month

Subscribe

Renews automatically, cancel anytime

Here’s what’s included in our digital subscription plans

Access to Exclusive Premium Stories Online

  • Over 30 behind the paywall stories daily, handpicked by our editors for subscribers

Complimentary Access to The New York Times

  • News, Games, Cooking, Audio, Wirecutter & The Athletic

Business Standard Epaper

  • Digital replica of our daily newspaper — with options to read, save, and share

Curated Newsletters

  • Insights on markets, finance, politics, tech, and more delivered to your inbox

Market Analysis & Investment Insights

  • In-depth market analysis & insights with access to The Smart Investor

Archives

  • Repository of articles and publications dating back to 1997

Ad-free Reading

  • Uninterrupted reading experience with no advertisements

Seamless Access Across All Devices

  • Access Business Standard across devices — mobile, tablet, or PC, via web or app

More From This Section

Topics :InflationRecessionDollarUS economyUS Federal ReserveGDPInterest rate hike

First Published: Jul 28 2022 | 8:30 PM IST

Next Story