By Alun John and Kevin Buckland
LONDON/TOKYO (Reuters) – The dollar on Tuesday sat just below the previous day’s five-week high, while the pound dropped sharply then recovered after a rise in Britain’s jobless numbers suggested fewer Bank of England rate increases could be needed in coming months to bring down inflation.
The dollar index, which tracks the greenback against six main peers, was down 0.14% at 102.29, having reached 102.75 in early trading on Monday, its highest since April 10.
The greenback’s Tuesday losses were largely against other safe havens with the dollar down 0.3% against the Swiss franc to 0.8928, and 0.2% lower against the yen to 135.8 with the rate-sensitive Japanese currency also reacting to a move lower in U.S. yields.
There was plenty to keep investors on edge including an important meeting between U.S. President Joe Biden and Republican House of Representatives Speaker Kevin McCarthy with a little more than two weeks to go before the U.S. government could run short of money to pay its bills.
Analysts say worries about the debt ceiling is part of the reason for the recent strength in the dollar, which also typically benefits from a “flight to safety” as well as changing expectations about central bank policy.
“Market expectations were for a fed rate cut this year, but the data just isn’t playing ball, and adding to that, there is a bit of safe haven demand,” said Jane Foley, head of FX strategy at Rabobank, pointing to slowing U.S. and eurozone growth, and Tuesday’s weak Chinese economic data as well as the debt ceiling worries.
“With all of that, do you really want to buy a lot of risky assets this year?” Foley said.
Elsewhere, sterling dropped as much as 0.5% against the dollar to $1.2460 and also softened to 87.17 pence per euro after Britain’s unemployment rate unexpectedly rose to 3.9% in the three months to March as more people sought to get back into the jobs market.
It later recovered to trade flat against the dollar.
Current market pricing indicates at least one more 25 basis point rate increase from the Bank of England, with a good chance of a further hike, but this data could cause the BOE to be more cautious. [GBP/]
“We think the BoE will hike once more in June, as we see a further tick up in regular pay growth next month, but this release reaffirms our view that it will then be done with hiking,” said Morgan Stanley analysts.
They added the data “bolsters the case for a June hold”.
The weak Chinese data was also weighing on the Australian dollar which dropped as much as 0.5% to $0.6665.
“The Aussie’s upside looks to have been capped for some time by investor concerns over China’s outlook,” said Sean Callow, a senior FX strategist at Westpac.
“Today’s data will set the Aussie back on its heels,” he added, predicting that the currency could ease to around 0.6645, the lower limit of its recent trading range.
The euro was at $1.0893, up a touch, largely looking through a plunge in German investor sentiment, and the EU’s statistics agency confirming euro zone first quarter growth was 0.1% quarter on quarter.
The dollar also gained on China’s offshore yuan, rising to as much as 6.981, its highest since March 10.
(Editing by Gareth Jones and Angus MacSwan)
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