Fundamental Analysis

Currency Futures Decline as Dollar Climbs on Safe-Haven Appeal

  • US business activity experienced a decline in June.
  • Business growth in the Eurozone nearly came to a standstill in June.
  • Japan’s core consumer inflation exceeded expectations in May.

Currency futures fell on Friday as the dollar rose on safe-haven appeal. The dollar gained strength against the euro due to disappointing global business activity data, negatively affecting risk sentiment. Additionally, hawkish statements from central banks added pressure on riskier currencies.

In June, US business activity experienced a decline, reaching a three-month low. Survey data released on Friday revealed a slowdown in services growth for the first time this year and a deepening contraction in the manufacturing sector. 

Despite these indicators, overall US economic growth slightly improved in the second quarter. However, concerns remain about a potential recession triggered by the Federal Reserve’s aggressive interest rate increases in the past year.

Euro-Area activity (Source: S&P Global)

Euro-Area activity (Source: S&P Global)

Data indicated that business growth in the Eurozone nearly came to a standstill in June. Manufacturing experienced a downturn, while the bloc’s dominant services sector showed minimal expansion. This decline in activity resulted from an overall decrease in demand since January. 

The release of this data followed surprising rate hikes and hawkish comments from central banks worldwide. This intensified market fears that policymakers need to tighten policy further to control inflation, even if they risk pushing their economies into a recession. 

Kit Juckes, chief FX strategist at Societe Generale, noted that the dollar had already been boosted before the European PMI data due to concerns about unexpected rate hikes in the UK and Norway.

The yen fell to a seven-month low against the dollar. This decline occurred as the Bank of Japan maintained an ultra-dovish stance, exerting renewed pressure on the Japanese currency.

Data released on Friday indicated that Japan’s core consumer inflation exceeded expectations in May, and an index excluding fuel costs rose at the fastest annual pace in 42 years. These figures pressured the Bank of Japan to phase out its extensive stimulus measures gradually.

On Friday, the pound depreciated significantly, marking its largest weekly loss in six weeks with a decline of approximately 1%. The Bank of England’s significant rate hike in response to persistent inflation fueled rising concerns about the UK economy slipping into a recession.

Traders exhibited caution on Friday, preferring the dollar while avoiding riskier currencies, which resulted in a struggle for the Australian and New Zealand dollars.