The euro experienced a significant decline against the dollar and pound on Wednesday, reaching a two-month low against the dollar and a 12-month low against the pound. This drop was triggered by survey data indicating that German and euro area business activity had declined more than expected in August. The flash Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, is considered a reliable indicator of overall economic health, and it fell to 47.0 in August, the lowest since November 2020. The services PMI also dropped to 48.3, marking the first time it fell below the growth threshold of 50 this year. The German composite figure reached its lowest point since May 2020, with manufacturing output declining and services activity contracting. As a result, the euro weakened against the dollar, reaching its lowest level since June 15, and against sterling, hitting a 12-month low.
Niels Christensen, the chief analyst at Nordea, commented that the decline in services activity was significant and contributed to a soft euro environment. If inflation data continues to slow, there is a possibility that the European Central Bank may pause its tightening cycle in September.
In contrast, the dollar strengthened to a two-month peak following the data. Investors are also closely monitoring Federal Reserve chair Jerome Powell’s upcoming speech at the Jackson Hole Symposium for insights into future monetary policy decisions. The dollar index, which measures the U.S. currency against six rivals, rose to its highest level since June 8, indicating a 1.8 percent increase in August, which may end its two-month losing streak. Strong U.S. economic data has alleviated concerns of a looming recession, but with inflation still above the Fed’s target, investors are cautious that interest rates may remain higher for a longer duration.
Markets are currently pricing in an 85 percent chance that the Fed will maintain its current policies at its next meeting. However, the likelihood of the central bank raising interest rates once more toward the end of the year has slightly increased.
Regarding the Japanese yen, it strengthened by 0.3 percent against the dollar, reaching 145.445 per dollar. However, it was not far off the nine-month milestone of 146.565 touched last week, causing traders to be on alert for signs of intervention. If the dollar surpasses the intervention threshold of 145 yen, there is speculation that Tokyo may intervene in the market to support its currency.
According to Colin Asher, a senior economist at Mizuho, the prospect of intervention below a USD/JPY rate of 150 is unlikely, and it would require the pair to approach 155 for Japan’s Ministry of Finance to consider intervening. Mizuho strategists mentioned that although currency intervention would not be a fundamental solution to the yen’s weakness, it could buy some time. They also highlighted that the Bank of Japan controls the short-end of the yen yield curve, which could be leveraged to determine when intervention is necessary.
Investors are also concerned about China’s yuan, which has fallen more than 5 percent against the dollar this year. This decline is primarily attributed to anxieties surrounding China’s deepening property crisis, which is further pressuring its post-pandemic economic recovery. The spot yuan opened at 7.2870 per dollar on Wednesday.
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