Foreign exchange trading reminder: the dollar is weakening, weak data supports US recession expectations, and European Bank interest rate hikes are expected to support the euro

The dollar index rose slightly in early Asian trading on April 21, Beijing time, and is currently trading around 101.81. The dollar fell on Thursday as weak data reinforced expectations that the world's largest economy could be headed for recession, further supporting the view that the Federal Reserve may pause in June after it expects another rate hike next month.

The dollar hit intraday lows against the yen and euro after data showed a rise in initial jobless claims last week, a sharp drop in manufacturing activity in the mid-Atlantic and a drop in existing home sales. But Cleveland Fed President Mester said the Fed still had more interest rate hikes ahead, helping the dollar cut losses. But she pointed out that the Fed's rate hikes since last year to curb high inflation were nearing an end.

New York Federal Reserve President William Williams said Wednesday that inflation remains a problem and the Fed will take action to reduce it.

"The rhetoric coming out of the Fed... is that they want to keep rates higher for a longer period of time," said Alvin Marino, macro strategist at Credit Suisse. He added: "But with the US data, we could see the dollar lose interest rate support. The market view that the Fed will cut rates this year is quite aggressive."

Data on Thursday showed initial jobless claims inched up to 245,000 last week, after the previous week's figures were revised to 1,000 more than previously reported.

A separate report from the Philadelphia Fed showed that its measure of manufacturing activity in the mid-Atlantic region plummeted in April to its lowest level in nearly three years. Manufacturers in the region expect activity to remain subdued for the next six months. Things remain grim in the U.S. housing market. Sales of existing homes fell 2.4 percent last month to a seasonally adjusted annual rate of 4.44 million. They rose in February for the first time in a year.

Erik F. Nelson, macro strategist at Wells Fargo Securities in London, said: "It is becoming increasingly clear that the US economy is heading for a recession. It is only a matter of time. A recession in the US will be bad for the dollar. If the US leads the world into a recession, it will be hard to see huge demand for the dollar."

U.S. interest rate futures have shown that the market expects a near 90% chance of the Federal Reserve raising interest rates by 25 basis points next month, with a roughly 69% chance of a pause in June.

After surging more than 8% in 2022, the dollar index has fallen 1.6% so far this year. The dollar index closed down 0.15% at 101.80 on Thursday.

The euro closed 0.10 per cent higher at 1.0964 against the dollar on Thursday, helped by expectations of a rise in interest rates from the European Central Bank.

The European Central Bank is expected to raise interest rates for the seventh time in a row at its May 4 meeting, providing support for the euro. Policymakers are leaning towards a 25 basis point increase, but it is also likely to be larger.

Sterling fell 0.05 per cent to 1.2432 against the dollar on Thursday as hotter-than-expected CPI data from the UK boosted bets on the Bank of England raising interest rates in May and remained supportive.

HSBC expects the Bank of England to raise interest rates by another 25 basis points in May and June, taking the bank rate to 4.75%.

Analysts at Standard Chartered expect the Bank of England to raise interest rates by 25 basis points in May. Analysts at Standard Chartered said: "Unexpected UK labour market and inflation data this week put pressure on Bank of England policymakers to raise interest rates. As the likelihood of another 25 basis point rate hike in May solidified this week, we adjusted our views accordingly and now expect a rate hike to 4.50% at the May meeting, having previously expected rates to remain unchanged. We also raised our base rate forecast to 4.50% through the end of the year (currently 4.25%)."

The analysts added: "There is a possibility of further rate hikes beyond May, but we believe the MPC will make decisions on a meeting-by-meeting basis and largely depend on month-to-month changes in economic data. Therefore, we do not yet agree with the market's current view that there could be a cumulative 75 basis points of rate hikes by the end of the year."

Key data and events on Friday

Institutional Perspectives Summary

1. Danske Bank: The Australian dollar is short and long against the US dollar;

① Danske Bank analysts believe that the Reserve Bank of Australia paused its rate hike cycle in March due to the turmoil in the (US) banking sector. After the release of strong employment data in Australia in March, the market currently expects the probability of the Reserve Bank of Australia raising interest rates in the summer to be about 70%, which we think is reasonable. With the global economic growth backdrop still weak and central banks generally still leaning towards tightening policy, the outlook for the Australian dollar against the US dollar remains moderately negative;

② If the April macroeconomic data show that the negative impact of banking concerns is limited, then the recovery in risk sentiment may boost the pair in the short term. But in the 6-12 month range, we maintain a downside-biased view

Jefferies forecasts that the dollar will decline again, and the pound will rise to 1.2700 before summer.

W. Brad Bechtel, Jefferies' global head of foreign exchange, said the dollar could fall again, which would allow the euro and pound to rebound to new highs for several months before summer in the northern hemisphere, but could then fall back.

He believes that the euro against the dollar will reach 1.1250, the pound against the dollar will reach 1.2700, the Australian dollar against the dollar will break through 0.7000, and may eventually reach 0.7200.

3. Experts say the dollar's status as the world's reserve currency is suffering an alarming collapse.

Stephen Jen, CEO and co-CIO of Eurizon SLJ Capital, said the market needs to pay closer attention to the de-dollarization trend because the dollar is losing its reserve currency status faster than many analysts noticed.

② Jen said in a report that in 2022, the share of the US dollar as the global reserve currency will decline at an average rate of 10 times that of the past 20 years. The coordinated sanctions against Russia have alerted many countries to look for alternative currencies for trade settlement and reserve accumulation.