US dollar gains after GDP data backs smaller Fed cut in September

Reuters

US dollar gains after GDP data backs smaller Fed cut in September

Aug 29, 2024 at 2:55 pm GMT

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Corrects day to Wednesday from Tuesday in 9th paragraph, corrects to month-end from year-end in 11th paragraph

U.S. GDP rises more than expected in Q2

U.S. jobless claims fall in latest week

Odds of 50-bp Fed rate cut in September down marginally

U.S. dollar on track for weakest month since November 2023

Euro falls to 10-day low after euro zone inflation data

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 29 (Reuters) -The U.S. dollar rose on Thursday after data showed the world's largest economy grew a little faster than expected in the second quarter, modestly reducing expectations for a larger 50 basis point interest rate cut next month by the Federal Reserve.

The report also added to growing expectations that the United States could avoid recession altogether, or go through just a mild one.

Following the U.S. data, the dollar rose to a one-week high against the yen to 145.495 and was last up 0.6% at 145.385. The dollar/yen currency pair is the most sensitive to economic expectations because it typically moves in tandem with U.S. Treasury two-year yields.

Against the euro, the dollar gained, with the single European currency falling 0.3% to $1.1084 EUR=EBS.

Thursday's data showed gross domestic product (GDP) grew at a 3.0% annualised rate in the second quarter, based on the Bureau of Economic Analysis's second estimate. That was an upward revision from the 2.8% rate reported last month, and higher than the 1.4% growth pace seen in the first quarter. Economists polled by Reuters had forecast GDP would be unrevised at a 2.8% pace.

In a separate report, initial jobless claims fell by 2,000 to a seasonally adjusted 231,000 for the week ended Aug. 24. Economists polled by Reuters had forecast 232,000 claims for the latest week.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased by 13,000 to a seasonally adjusted 1.868 million during the week ending Aug. 17, the claims report showed, near the levels seen in late 2021, suggesting persistent unemployment.

"The data takes the risk of a 50 basis point cut off the table, though the labor market report next week is more important," said Brad Bechtel, global head of FX, at Jefferies in New York. "A 25 basis point cut is pretty much assured at this point."

U.S. rate futures have priced in a 35% chance of a 50 basis point easing next month, slightly down from the 37% probability seen late on Wednesday, according to LSEG calculations. Markets also priced in about 102 basis points of cuts by the end of the year.

The dollar index advanced 0.4% to 101.44 =USD following the report. On the week, it has gained 0.7%, on track for its largest weekly rise since early April.

MONTH-END FLOWS

"The dollar has been better bid pretty much due to month-end flows. We'll likely see a continuation of that," said Jefferies' Bechtel.

Typically as the month-end approaches, investors would square up positions so when an asset has been sold off for the month like the dollar, they would normally buy it back to balance their books or portfolios.

For the month of August, the dollar has lost 2.5% of its value, on pace for its largest monthly fall since November 2023.

"The dollar index has been oversold when it was down below the 101 area. I would expect that we migrate back to the 103-104 area. But again, the labor market report will be critical for that."

Investors now await Friday's release of the U.S. core personal consumption expenditures (PCE) price index — the Fed's preferred measure of inflation — which could provide further clues on the size of the rate cut at the September meeting, including the pace of the easing cycle.

In the euro zone, the euro fell to a 10-day low of $1.1059, after hitting a 13-month high on Friday at $1.1201. The euro was partly weighed down after inflation data from Germany and Spain led investors to increase their bets on the European Central Bank interest rate easing cycle.

Inflation fell in six important German states in August, suggesting national inflation could decline noticeably this month, while dropping to its slowest pace in a year in Spain.

Money markets priced in 67 basis points of ECB rate cuts in 2024 EURESTECBM3X4=ICAP, from around 63 basis points before the data.

Currency bid prices at 29 August 02:40 p.m. GMT
Description	RIC	Last	U.S. Close Previous Session	Pct Change	YTD Pct	High Bid	Low Bid
Dollar index	=USD	101.49	101.01	0.5%	0.12%	101.58	100.88
Euro/Dollar	EUR=EBS	1.1066	1.112	-0.48%	0.25%	$1.114	$1.1056
Dollar/Yen	JPY=D3	145.41	144.64	0.44%	3%	145.39	144.225
Euro/Yen	EURJPY=	1.1066	160.76	0.1%	3.4%	161.26	160.04
Dollar/Swiss	CHF=EBS	0.8488	0.8423	0.77%	0.85%	0.8493	0.8401
Sterling/Dollar	GBP=D3	1.3163	1.3191	-0.22%	3.43%	$1.3227	$1.1056
Dollar/Canadian	CAD=D3	1.3478	1.3481	-0.01%	1.69%	1.3491	1.3451
Aussie/Dollar	AUD=D3	0.6793	0.6785	0.13%	-0.37%	$0.6824	$0.6781
Euro/Swiss	EURCHF=	0.9393	0.9365	0.3%	1.15%	0.9394	0.9354
Euro/Sterling	EURGBP=	0.8406	0.8428	-0.26%	-3.02%	0.8434	0.8403
NZ Dollar/Dollar	NZD=D3	0.6254	0.6246	0.14%	-1.03%	$0.6298	0.6242
Dollar/Norway	NOK=	10.5127	10.4951	0.17%	3.73%	10.5353	10.4645
Euro/Norway	EURNOK=	11.635	11.6732	-0.33%	3.66%	11.6971	11.6245
Dollar/Sweden	SEK=	10.2468	10.1832	0.62%	1.79%	10.265	10.1677
Euro/Sweden	EURSEK=	11.3413	11.3347	0.05%	1.93%	11.3603	11.3109