Dollar extends decline, euro reaches 7-1/2 week high

Currency markets remained in focus on Monday as the U.S. dollar continued its decline, reaching a 6-1/2 week low of 104.84 after a 1.4% fall last week. The decline comes after the Federal Reserve’s recent moderation in hawkish rhetoric and signs of economic moderation in the United States.

The euro gained 0.2% against the dollar, reaching a 7-1/2 week high of $1.0756. The weakening dollar also triggered rallies in sterling and the Australian dollar, while the Japanese yen bounced back from the weaker side of 150 per dollar.

Analysts at JPMorgan indicated that a sustained dollar sell-off would require improvements in the eurozone, China, and other regions, which they described as “still tenuous.” Economic data from the eurozone indicated a worsening business downturn, raising concerns about a possible recession. Capital Economics Europe economist Adrian Prettejohn commented, “Final PMIs released today… are consistent with our forecast that euro-zone GDP will contract again in Q4,” adding that the data suggested easing price pressures.

Futures markets suggested an 80% probability of the European Central Bank cutting rates by April and a 90% chance of the Federal Reserve pausing its rate hikes, with an 86% probability of the first policy easing in June. Federal Reserve Chair Jerome Powell’s remarks on balanced economic risks and softer U.S. data led to further declines in Treasury yields.

In response to the economic challenges, the U.S. government reduced its refinancing estimate for the quarter and announced lower increases in long-dated debt auctions than anticipated. Yields on 2-year notes fell by 25 basis points in the past two weeks, while 10-year yields remained near a five-week low at 4.593%. The front end of the curve stayed deeply inverted.

Sterling strengthened by 0.4% to $1.2425. Investors now await Britain’s GDP data for the third quarter, with the pound having rallied significantly last week in a market heavily short the currency. Despite the recent gains, sterling remained down by approximately 5.5% since its peak in July.