By Gertrude Chavez Dreyfuss
NEW YORK (Reuters) – The dollar weakened against most currencies on Thursday after weak economic data from the world’s largest economy reinforced expectations that the Federal Reserve will start cutting interest rates later this year.
The yen edged up against the dollar from a 38-year low following the U.S. data, while traders remained on the lookout for signs that Japan might intervene to support its currency.
In the U.S., state unemployment claims reported fell to 233,000 in the week ending June 22. But the number of people receiving benefits rose by 18,000 to 1.839 million in the week ending June 15, after assistance began.
At the same time, new orders for major capital goods manufactured in the U.S. unexpectedly fell in May, suggesting that business capital spending weakened in the second quarter.
Orders for non-defense capital goods excluding aircraft fell 0.6 percent last month, the data showed. Economists polled by Reuters had expected orders for core capital goods to rise slightly, 0.1 percent.
Further data showed economic growth slowed sharply in the first quarter, with gross domestic product rising at an annualized rate of 1.4%, revised slightly upwards last quarter, but down from the 3.4% recorded in the final three months of 2023.
The GDP report also showed weakness in consumer spending, with U.S. consumption growth revised down to 1.5% from a previous forecast of 2%.
“The market seems to be focusing on the shortfall in consumer spending more than anything else, which is certainly a sign of a slowdown in the U.S. economy,” said Helen Given, a foreign exchange trader at Monex USA in Washington.
“While the lower than positive first-quarter GDP reading was expected, this drop in consumption suggests a further slowdown may be to come.”
The Yen Problem
In afternoon trading, the yen edged up against the dollar to 160.765 yen, after falling to 160.88 yen on Wednesday, its lowest since December 1986.
The Japanese yen continues to be hurt by the widening interest rate differential between the United States and Japan, losing about 2.1% this month and 12% against a robust dollar so far this year, prompting investors to use it as a funding currency for carry trades.
In a carry trade, investors borrow in a currency with a low interest rate and invest the proceeds in higher-yielding assets.
Still, the yen’s recent slide below the key 160 yen level to the dollar has traders worried about possible intervention from Tokyo authorities, who spent 9.79 trillion yen ($60.94 billion) in late April and early May to prop up the yen 5% from what was then a 34-year low of 160.245 yen.
Analysts said the risk of intervention was rising but that Japanese authorities may wait until Friday’s release of the U.S. personal consumption expenditures (PCE) price index before entering the market. Even then, any intervention would likely be limited in effectiveness, they said.
“While the Bank of Japan is known to take action on Friday, the best-case scenario is that U.S. inflation slows significantly, further encouraging calls for the Fed to cut interest rates this year,” said Michael Boutros, senior FX analyst at Forex.com.
Meanwhile, the pound rose 0.2% to $1.2643 and the euro rose 0.2% to $1.0704.
The euro is expected to fall about 1.4 percent this month, hit by political turmoil in the euro zone ahead of French general elections starting this weekend.
The dollar index fell 0.1% to 105.91, not far from Wednesday’s nearly two-month high of 106.13.
However, comments from Atlanta Fed President Raphael Bostic, who is a voter on this year’s Federal Open Market Committee (FOMC), limited the dollar’s overall decline.
In an essay published Thursday, Bostic said that under current circumstances “we continue to believe that a cut in the federal funds rate will likely be necessary in the fourth quarter of this year.”
In other developments, Wednesday was the last day investors could trade currencies during the quarter, as spot foreign exchange settlement takes two business days.
Trading in U.S. stocks moved to a shorter settlement cycle called T+1 last month.
(Reporting by Gertrude Chavez-Dreyfuss in New York; additional reporting by Amanda Cooper in London, Ray Wee and Ankur Banerjee in Singapore; Editing by Shri Navaratnam, Jacqueline Wong and Sharon Singleton)