The Dollar Falls On Recession Fears As C.Bank Meetings Approach

The dollar fell on Friday as concerns about a US slowdown grew, with markets on high alert ahead of a spate of central bank meetings next week, with the Federal Reserve taking center stage.

The euro surged over 0.5% against the US dollar overnight, closing close on a six-month high reached the start of the week. It was recently 0.23% higher at $1.0579 and is on pace for a third consecutive week of gains.

Sterling also gained 0.23% overnight, closing at $1.22695, not far from Monday's six-month high of $1.2345. The Japanese yen increased by 0.4% to 136.04 per dollar.

The number of Americans submitting new claims for unemployment benefits grew marginally last week, according to figures released on Thursday, with continuing claims reaching a 10-month high in late November, fueling worries that the world's biggest economy may face a recession next year.

“We've got a very difficult forecast the next year, which is playing into traders' thinking process. We're looking...at considerably weaker growth internationally, lower growth out of the U.S. as well,” said Jarrod Kerr, chief economist at Kiwibank.

After falling 0.3% overnight, the US dollar index slipped 0.27% to 104.53.

This quarter, it has dropped about 7%, putting it on course for the greatest quarterly drop since 2010.

“It's (also) very much positioning right now,” Kerr noted, referring to the Federal Reserve's policy meeting next week.

Money markets are pricing in a 93% likelihood of the Fed raising rates by 50 basis points, with rates now expected to peak at just under 5% in May.

Expectations that the Fed would slow the pace of interest rate rises and that rates may not climb as high as originally anticipated have knocked the dollar more than 8% off its two-decade high versus a basket of currencies, which was reached in September.

U.S. Treasury yields Treasuries have also fallen, with the two-year yield, which often reflects interest rate forecasts, recently trading at 4.3035%, down from a 15-year high of over 4.9% last month.

A region in the United States that is carefully monitored. The Treasury yield curve, which measures the difference in rates between two- and ten-year Treasury notes, was inverted at -83.7 basis points.

An inversion of this yield curve is usually a sign of impending recession.

The European Central Bank and the Bank of England will both make monetary policy decisions next week, with markets looking for clarity on the outlook for 2023.

The Australian dollar was up 0.4% at $0.6797, while the New Zealand dollar was up 0.42% at $0.6407.

Because they are often used as liquid proxies for the Chinese yuan, the antipodean currencies have benefited from China's recent relaxation of its harsh COVID regulations.

The offshore yuan gained more than 0.2% against the dollar, reaching 6.9424.

“The China reopening theme is a huge one, particularly (coming) from a low base,” said Christopher Wong, a currency strategist at OCBC.

“Chinese assets were badly oversold prior to the current comeback. More reallocation back to RMB-assets would boost RMB.”

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