Euro sinks after bleak manufacturing, services data; U.S. dollar rises

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The euro slid across the board on Thursday as weaker-than-expected German and French PMI data showed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank.

The dollar, on the other hand, rose against a major currency basket, as risk appetite soured, with safe-haven U.S. Treasuries in demand amid rising recession prospects. [US/]

Higher prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 at the height of the coronavirus pandemic. The S&P Global (NYSE:SPGI)’s headline factory Purchasing Managers’ Index (PMI) fell to a near two- year low of 52.0 from 54.6.

“The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the U.S.,” said Mazen Issa, senior FX strategist in a research note.

“This dynamic is typically consistent with further U.S. dollar resilience. This could be bolstered as recession fears mount.”

Following the data, money markets priced in about 30 basis points (bps) of ECB rate hikes in July compared to 34 bps on Monday. Traders also trimmed expectations of how much the ECB will hike rates by the end of 2022 to 161 bps, compared to 176 bps on Monday.

In the United States, the U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, dropped to 51.2 in June from a final reading of 53.6 in May, S&P Global said on Thursday .

A reading above 50 indicates growth in the private sector. Its flash composite orders index tumbled to 47.4, the first contraction since July 2020, from 54.9 in May.

Against the dollar, the euro declined 0.5% to $1.0509. It earlier declined below a key $1.05 level for the third time this week. The euro also declined 1.4% versus the Japanese currency to 141.85 yen.

The euro’s losses pulled the dollar away from earlier lows and sent the greenback into positive territory against its rivals after cautious comments by Federal Reserve Chair Jerome Powell on Wednesday weighed on sentiment.

The dollar index rose 0.3% to 104.48 .

While markets have steadfastly held the view that the Fed will raise rates by another 75 bps in July, some analysts believe the ECB and Bank of England will adopt a softer tightening path or risk damaging growth.

Fed Chair Jerome Powell said on Wednesday a recession was “certainly a possibility,” reflecting fears in financial markets that the Fed’s tightening pace will throttle growth.

The Fed chief also testified on Thursday before the House of Representatives, reiterating its “unconditional” commitment to fight inflation. [nL1N2YA1RT]

“Our expectation that global factors will be increasingly important in driving further dollar strength is consistent with emerging signs of slowing economic growth amid aggressive monetary tightening by the Fed and most other major central banks,” said Jonathan Petersen, markets economist, at Capital Economics.

Since the beginning of the year amid the turmoil over Ukraine and the slide on Wall Street with the S&P 500 down 20%, the dollar index has gained more than 9%.

Against the yen, the dollar dropped 0.9% to 134.94 yen, retreating further away from a 24-year high hit earlier this week.

U.S. data showed the number of Americans filing new claims for unemployment benefits slipped last week, as labor market conditions remained tight, though a slowdown is emerging.

U.S. initial jobless claims fell to a seasonally-adjusted 229,000 for the week ended June 18. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March.

The dollar index briefly slipped following the U.S. data.