Dollar wallows near 6-week low against yen in bid to slow Fed hikes

A currency trader counting US dollar banknotes at a foreign exchange market in Karachi. The dollar languished near a six-week low against the yen amid a sharp drop in Treasury yields after investors interpreted a shrinking US economy as more reason for the Federal Reserve to loosen its foot tightening pedal.

Asif Hasan | AFP | Getty Images

The dollar languished near a six-week low against the yen amid a sharp drop in Treasury yields after investors interpreted a shrinking US economy as more reason for the Federal Reserve to loosen its foot tightening pedal.

U.S. gross domestic product in the second quarter contracted at an annualized rate of 0.9%, according to the Commerce Department’s preliminary estimate released Thursday. This followed a 1.6% contraction in the first quarter.

Money markets are currently giving a 76% chance that the Fed will slow the pace of rate hikes to half a point at the next meeting in September, down from a 14% chance for a third straight 75 basis point hike.

The dollar was trading at 134.39 yen, rebounding 0.13% after an overnight plunge of 1.74%, the highest since March 2020. It hit a low of 134.2 on Thursday, the weakest since the June 17.

Long-term Treasury yields held around 2.67% on Friday in Tokyo, after falling for three days.

The dollar index, which measures the currency against its six major peers, edged up 0.03% to 106.25, after falling to a more than three-week low of 106.05 on Thursday, when it recorded a decline of 0.28%.

“Lower yields and positive risk sentiment are [a] tried and tested recipe for a softer dollar,” although that weakness was “flattered” by an outsized rally in the yen, Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a client note.

He warned, as many analysts have this week, that “the market’s conclusion that the Fed has lost some of its hawkishness [is] questionable.”

The GDP data came a day after the Fed raised rates by 75 basis points as expected and pledged not to flinch in its battle with the most intense US inflation since the 1980s, even if it means an “extended period” of economic weakness and a slowing job market.

Fed Chairman Jerome Powell said Wednesday that he does not believe the United States is in a recession, given the strength of the labor market.

Two consecutive quarterly contractions are widely considered by economists to signal a technical recession. In the United States, however, the National Bureau of Economic Research is the arbiter of recessions, which it defines as “a significant decline in economic activity spread throughout the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

Meanwhile, the euro was steady at $1.01945 after a seesaw Thursday session that ultimately ended with little change.

Europe faces its own downside risks amid a lingering energy crisis. The International Monetary Fund has warned that if Russia, which cut gas supplies to Europe this week, cuts supplies completely by the end of the year, the region could face zero economic growth l ‘next year.

The pound was down 0.09% at $1.21725, falling back from its Thursday high of $1.21915, the strongest since June 29.

The Aussie slipped 0.09% to $0.69985, pulling away from the high since June 17 at $0.70135 hit on Thursday.

Bitcoin was roughly flat around $23,851, after a two-day rally.

A push above $24,280.30 would take it to the highest since June 13.

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