Dollar hits two-month low as US economic momentum slows

Tuesday, 1 May 2012 02:23 -     - {{hitsCtrl.values.hits}}

LONDON (Reuters): The dollar fell to a two-month low against a basket of currencies on Monday, weighed down after modest first quarter growth in the US economy kept alive chances of further monetary easing by the Federal Reserve.

The dollar is likely to come under more pressure if data, including US jobs numbers, this week disappoints. US growth cooled in the first quarter partly due to businesses cutting back on investments, reinforcing the Central Bank’s contention that interest rates should be kept near zero through 2014.

The slowdown fuelled speculation that the Fed may eventually launch another bond buying program, or a third round of quantitative easing. That would likely have a negative effect on the dollar while giving riskier assets like stocks, commodities and higher-yielding currencies like the Australian dollar a boost.

The greenback’s woes even supported the euro despite prospects of a prolonged slowdown in the euro zone as severe austerity measures take a toll on economic activity across the region.

Spain slipped back into recession as gross domestic product shrank 0.3 per cent in the January to March quarter, data showed on Monday.

“The dollar is under pressure but the euro is by no means out of the woods and the Spanish GDP data is a pointer,” said Peter Kinsella, Currency Strategist at Commerzbank, London.

“Besides, liquidity in the markets is a bit thin because of holidays this week and this can make price movements a bit exaggerated.”

Markets in most of Europe will be shut on Tuesday for the May Day holiday while Japan celebrates Golden Week holidays, keeping trading on foreign exchange markets a bit subdued.

Against its basket of currencies, the dollar fell to 78.638, its lowest level since 1 March.

Against the yen, the dollar dropped to 80.08 at one point on trading platform EBS, its lowest level since late February, and last stood at 80.14 yen, down 0.2 per cent from late US trade on Friday.

The euro was flat against the dollar at $ 1.3250, not far from a near one-month high of $ 1.32706 struck on Friday with traders citing buy stops above $ 1.3270, a break of which could see it rise to $ 1.33. But any bounce to around those levels could see more selling by bearish investors.

The common currency was down 0.3 per cent against the yen, dropping to 106.09 yen and hovering close to two-week lows. Investors expect the yen to benefit from safe haven demand stemming from the euro zone’s debt problems.

Business confidence in the region weakened sharply in April and the ECB could scale back its economic outlook at its policy meeting on Thursday. As such, the rising probability of further easing by the European Central Bank in coming months could weigh on the euro.

The dollar is likely to take cues later this week from a batch of US economic data, including the Institute for Supply Management’s (ISM) gauges of the manufacturing and services sectors, as well as jobs numbers.

Both will be fresh pointers to US economic momentum which has shown signs of flagging, suggesting the Fed may consider easing monetary policy further in June.

“Clearly if we do get a weak ISM and a 125,000 (increase in payrolls), this dollar weakness is going to continue,” said Rob Ryan, Singapore-based FX strategist for BNP Paribas, whose economists are predicting an additional 125,000 U.S. jobs in April.

Average market expectations are for a rise of 170,000.

Market players said the dollar may fall further against the yen in the near term given a drop in US Treasury yields. The dollar/yen exchange rate has a tight relationship with the spreads between yields on US Treasuries and Japanese Government bonds.

On Friday, the 10-year Treasury yield dipped to as low as 1.884 per cent, its lowest level in nearly three months.

Other factors that suggest the dollar may stay under pressure against the yen include the existence of sizeable bearish positions in the yen, a lack of interest in foreign bond investment among Japanese investors, and the low probability of yen-selling intervention, traders said.