The U.S. dollar weakened on Wednesday after new economic data provided another sign of an economic slowdown.
The dollar index, which measures the currency against major peers, declined by 0.345 percent. The index gained 0.5 percent the day before as analysts said risk appetite among investors declined due to heightened risks of widespread economic contraction.
Eurozone’s currency rebounded during the session, gaining 0.4 percent over the dollar after losing 0.7 percent the day before. The euro, nevertheless, remains on track to post over a 1.2 percent gain against the U.S. dollar this month.
The greenback also fell against the Japanese yen, which traded 0.13 percent higher to 133.52 per dollar. Sterling traded 0.39 percent higher against the dollar to $1.2457 during the session after previously losing 0.6 percent.
Meanwhile, the Swedish crown tumbled after the country’s central bank announced it would soon end its monetary tightening cycle. The dollar strengthened by 0.90 percent to 10.337 after the announcement, while the euro rose by 1.05 percent to a record 11.426.
“Whatever slowdown we’re going to see in the U.S. is going to come earlier and it’s going to be more intense, at least in its early stages, than whatever we’re going to see coming out of the rest of the world.”
Thierry Wizman, Global FX Strategist at Macquarie
Macquarie global FX strategist Thierry Wizman said signs of a U.S. economic slowdown and decelerating inflation that would be “more intense” than other economies were responsible for the weakening dollar. U.S. business spending on core capital goods was lower than earlier estimates last month, signaling lower productivity among domestic manufacturers.
The data supported a prior report from the U.S. Richmond Federal Reserve, showing that the manufacturing index was at -10 in April, the fourth straight month of decline. Confidence among U.S. consumers also hit a nine-month low of 101.3 this month.
The manufacturing sector accounts for approximately 11.3 percent of the U.S. economy. Analysts said this sector was significantly affected by the Fed’s fastest monetary tightening campaign in four decades, which began in March last year. The market currently expects the U.S. central bank to raise the benchmark rate by 25 basis points in its policy meeting next week, which may further create adverse impacts on manufacturing.
Unlike the U.S., Europe unexpectedly projected higher growth than earlier estimates. Germany, the largest economy in the E.U., revised its forecast for economic growth this year from 0.2 percent to 0.4 percent. While the market predicts that the Fed will pause the interest rate hike after May, it forecasts further rate hikes by the European Central Bank due to its more positive economic outlook.
Debt ceiling crisis threatens U.S. dollar
Over the past weeks, analysts have raised concerns about the debt ceiling crisis, which they say will negatively affect the dollar’s value in the global market. Maintaining the current $31.4 trillion debt ceiling can make the U.S. default on its debt in the coming months due to its large spending.
On Wednesday, the U.S. House of Representatives passed a bill to raise the nation’s debt ceiling, which includes widespread spending cuts over the next decade. The House Bill would boost the country’s borrowing authority by $1.5 trillion or until March 31 next year, paring spending to 2022 levels and capping spending growth at one percent a year.
Analysts said the bill would likely not pass the Senate, and President Joe Biden would use his veto power even if it did. However, Republican House Speaker Kevin McCarthy said this action would open a negotiation with the White House about raising the debt limit and reducing spending.