The euro fell as Germany entered recession, and the dollar rose to a two-month high

TOKYO (Reuters) – The euro fell on Thursday as Germany, Europe’s largest economy, confirmed it was in recession, while the dollar reached a two-month high, benefiting safe-haven demand as concerns over a US default mounted.

The latest concern was raised by Fitch Ratings, which put US debt ratings “AAA” on negative watch, ahead of a possible downgrade if lawmakers fail to agree to raise the $31.4 trillion debt ceiling.

The greenback has benefited from safe-haven demand with just one week left to resolve debt-ceiling talks before the “tenth date” on June 1, when the Treasury warned it would not be able to pay all of its bills.

“There has been risk aversion this week, and that has benefited the dollar overall,” said Stefan Mellen, senior analyst at Danske Bank.

Meanwhile, mounting signs of economic distress in Europe sent the euro lower against the dollar.

The latest sign of weakness came from Germany, where the economy contracted slightly in the first quarter and was also in recession after negative growth in the fourth quarter of 2022.

“We’ve seen some mixed macro data across the Atlantic this week, and while Germany is not the euro, momentum in the economy is startlingly weak,” Danske Bank’s Mellen said, also noting this week’s Ifo and PMI data.

The US dollar index, which measures the currency against six major peers including the euro, rose 0.3% to 104.16, the highest level since March 17.

The euro fell about 0.2%, enough to refresh a two-month low of $1.0715.

The pound fell 0.1%, after briefly hitting its weakest level since April 3 at $1.2332.

Against the yen, the dollar rose to its highest since November 30 at 139.705.

The greenback has also been supported by reducing bets on Fed rate cuts this year, as the economy has proven resilient to the effects of the central bank’s aggressive tightening campaign so far.

Traders trimmed their expectations for a Fed rate cut this year to just a quarter of a point in December, from 75 basis points previously.

They also increased the odds of another quarter-point increase in June to about 1 in 3, after several Fed officials sounded hawkish recently, and minutes from the Fed’s latest meeting showed that “almost all policymakers see upside risks to inflation.”

“The main drivers at the moment are global risk aversion… and repricing along the US forward curve,” said Roberto Mialic, strategist at UniCredit FX.

“Both serve to keep the dollar sharp on demand and potentially prevent a full reversal of the current strength of the US dollar even if the (debt ceiling) is reached and risk appetite resumes,” he added.

The Chinese yuan renewed its lowest level in six months, falling to 7.0903 per dollar in the foreign market, after recent economic indicators pointed to weak consumer demand, and indicated that the recovery after the epidemic had already run its course.

Ken Cheung, senior Asian currency analyst at Mizuho Bank, expects the yuan to remain under pressure until Chinese economic data shows improvement or the People’s Bank of China takes policy measures to stabilize the currency market.

The impact of China’s economic weakness was felt sharply by the Australian dollar due to close trade ties, falling to a 6-and-a-half-month low of $0.6520.

The New Zealand dollar was still reeling from the sharp dovishness of the central bank on Wednesday, which led to a decline of 2.2%. It fell another 0.5% to its lowest since mid-November at $0.6069.

Reporting by Kevin Buckland. Edited by Edmund Kellman

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