The Dollar fell on Thursday, touching a two-week low versus the Euro after data showing a surprisingly sharp contraction in regional factory activity renewed fears of a US recession and more Federal Reserve rate cuts. Also, a weekly jobless claims report suggested the labor market was starting to strain from the slowing economy, leaving investors with no reason to buy the Dollar.
Interest rate futures were at one point fully pricing in another 50bp rate cut in the Fed's benchmark overnight lending rate, to 2.5% at next month's meeting. More US rate cuts would further erode the Dollar's appeal to global investors, particularly when central banks in Europe and Australia are either keeping rates steady or raising them.
EurUsd rose to two-week highs at 1.4838 and it was traded 1.4813, up 0.62% posting its biggest one-day advance since January 28th. Falling US stocks dragged UsdJpy 0.56% lower to 107.43. UsdChf was down 1% to 1.0895. Low-yielding currencies such as the Yen and the Swiss franc tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their respective countries.
News that the Philadelphia Fed business activity index contracted to -24 in February, its worst reading since 2001, rattled investors and confounded economists, who had expected a reading of -11.
Minutes from the Fed's last policy meeting showed on Wednesday that policy-makers are worried about still slower US growth even after the series of aggressive rate cuts. The Fed also lowered its US growth forecast for 2008. Even more concerning for investors; the weekly jobless claims data showed more workers were remaining on state unemployment rolls.
While investors expect the Fed to continue on its monetary easing path, they are scaling back expectations for ECB rate cuts this year after French inflation rose at its fastest annual pace in at least 11 years. Futures market are now pricing in only a 25% chance of a rate cut from 4% by June. Just last week, a June rate cut had been fully priced in.
EurJpy rose to five-week highs near 159.58, but last traded flat at 159.15. GbpUsd surged 1.1% to 1.9635 +1.1% following an unexpectedly strong retail sales report that helped ease concerns about the health of the UK economy.