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Dollar weakens ahead of U.S. GDP release

Published 27/04/2023, 08:34
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Investing.com -- The U.S. dollar weakened in early European trade Thursday ahead of the release of key U.S. growth data, amid concerns over banking contagion risks, a slowing economy and a debt ceiling standoff.

At 03:15 ET (07:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 101.162, adding to an overnight fall of 0.4%, when it touched a near two-week low of 101.00.

The dollar has continued to fall Thursday, with the mood surrounding the currency not helped by depositors’ confidence seemingly draining away from First Republic Bank (NYSE:FRC) after it revealed $100 billion in customer withdrawals last month.

Its shares slumped 30% on Wednesday, adding to similar losses the previous session, raising questions about its long-term viability as well as the extent of future lending from similar U.S. regional lenders if they choose to hoard cash.

Fears that reduced lending will crimp further economic activity are adding to signs that U.S. economic growth is already slowing as a result of the Federal Reserve’s aggressive monetary tightening to combat soaring inflation.

The first quarter U.S. gross domestic product figure is due for release later in the session, as is expected to show that growth retreated to 2.0% for the first three months of the year, from 2.6% the prior quarter.

The Fed is likely to hike interest rates by a further 25 basis points next week, but expectations are growing that this will represent the peak, with rates set to start falling in the second half of the year.

“The dollar hasn’t really connected with the dovish repricing in Fed rate expectations, with rate cut expectations that have risen steadily since the end of last week,” said analysts at ING, in a note.

U.S. politicians also continue to struggle to agree on whether to raise the country’s $31.4 trillion debt ceiling, prompting U.S. sovereign CDS spreads to rise as investors take out hedges against default.

The euro has been one of the main beneficiaries of this dollar weakness, with EUR/USD rising 0.1% to 1.1046, edging back toward the overnight peak at 1.1096, the highest since April of last year.

German consumer sentiment rose on Wednesday, with the forward-looking GfK index climbing for the seventh increase in a row, on signs that the eurozone’s largest economy is set to escape falling into recession this year.

The European Central Bank is also expected to raise interest rates next week, but with the European economy showing signs of recovery and the region’s banking sector seen as more resilient, the central bank is likely to continue hiking rates into the summer, supporting the single currency.

GBP/USD fell 0.1% to 1.2463, AUD/USD rose 0.4% to 0.6623, while USD/JPY edged higher at 133.71, ahead of a Bank of Japan meeting on Friday.

New BoJ Governor Kazuo Ueda signaled that the bank will largely maintain its ultra-dovish stance in the near term, although high inflation and wage growth could spur some tightening later this year.

USD/TRY rose 0.2% to 19.4304 ahead of a policy-setting meeting by Turkey’s central bank, with policymakers expected to keep its benchmark rate at 8.5% for a second month.

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