The U.S. dollar rose to a fresh two-month high on Thursday due to concerns about a potential U.S. default. Fitch has warned of a rating downgrade, which has contributed to spur fear and risk-off mode among investors. The euro, on the other hand, extended losses as Germany, the biggest economy in Europe, has officially entered a technical recession.
Safe Haven Demand Pushes the Dollar to Fresh Highs
Fitch has put the United States’ “AAA” rating on watch for a possible downgrade due to the uncertainty, further worrying global markets. According to recent a report by the credit agency, Fitch anticipates the debt ceiling to be resolved before the deadline. However, there is a higher chance than before that the debt ceiling may not be raised or suspended before the deadline. This could result in the government being unable to make some of its financial obligations.
The US Dollar Index (DXY), which gauges the dollar’s strength against a basket of six major currencies, hit a fresh two-month high at 104.16, up by 0.27%.
The dollar’s safe haven status has allowed it to benefit from the lack of progress in negotiations to raise the U.S. government’s $31.4 trillion debt ceiling. According to Treasury Secretary Janet Yellen, the department is most likely to run out of money by early June.
Hawkish commentary of the Federal Reserve’s policymakers on monetary policy and the fact that the U.S. economy has held up well despite the strict tightening measures implemented so far provided a boost for the U.S. dollar.
According to the Bureau of Economic Analysis, the annual rate of growth for real gross domestic product (GDP) was 1.3 percent in the first quarter of 2023, in line with the second estimate. In the fourth quarter, real GDP grew 2.6 percent.
The number of people who filed new claims for unemployment benefits in the week that ended on May 20th was 229,000. This is 4,000 higher than the revised number of new claims filed in the previous week, but lower than expectations at 249,000. The 4-week moving average remains at 231,750, which is the same as the revised average of the previous week. The previous week’s average was revised to 231,750, reduced by 12,500 from 244,250.
The recent minutes released by the Fed on Wednesday indicated that there was a disagreement among officials on whether additional interest-rate hikes were needed to reduce inflation. However, it was noted that the labor market and price pressures have been more robust than anticipated since the May meeting, which reduces the likelihood of Fed cutting interest rates this year.
Germany technically falls into a Recession
Germany’s economy showed further weakness as it contracted slightly in the first quarter and entered a recession following negative growth in the fourth quarter of 2022. The euro continued to decrease and is approaching $1.07, the lowest levels since March.
German Finance Minister Christian Lindner commented that the GDP data has shown unexpected negative signals. He further stated that dealing with weak economic dynamics is a responsibility of politicians.
Governing Council member Bostjan Vasle is the latest to state that further interest rate increases may be necessary to control inflation, a position that has been commonly taken by officials at the European Central Bank.
Markets are yet anticipating further rate hikes by the European Central Bank (ECB) throughout the year. However, the slowing growth in the Eurozone may force the ECB to alter its stance if the economic slowdown stretched to more european countries.