Euro Falls on Gloomy PMI Data, Dollar Hits 2-Month High

The Euro experienced a decline against both the US dollar and the British pound on Wednesday following the release of survey data that revealed a more substantial than anticipated drop in business activity across Germany and the eurozone in August.

The flash Composite Purchasing Managers' Index (PMI) for the eurozone, a reliable gauge of overall economic well-being compiled by S&P Global, dipped to 47.0 in August from July's 48.6. This marked its lowest point since November 2020. Concurrently, the services PMI plummeted from 50.9 to 48.3, slipping below the pivotal 50-mark that signifies the boundary between growth and contraction for the first time this year.

The German composite figure experienced its lowest point since May 2020, driven by a deepening decline in manufacturing output alongside a renewed contraction in services activity. Consequently, the euro weakened against the dollar, reaching its lowest value since June 15 at $1.0812. Additionally, it hit a 12-month nadir against the pound at 84.93 pence.

Niels Christensen, the chief analyst at Nordea, noted, "The sharp drop in services activity has led to a weakened euro environment. If inflation data continues to decelerate, the European Central Bank might opt to halt their tightening cycle come September."

The dollar, in contrast, surged to a two-month peak post-data release. Investors were also anticipating insights into the monetary policy direction from Federal Reserve Chair Jerome Powell's upcoming speech at the Jackson Hole Symposium. The dollar index, a measure of the US currency's strength against six major counterparts, ascended to 103.80, its highest level since June 8. August saw the index rise by 1.8%, signaling the end of a two-month decline streak.

Despite a recent series of robust US economic data that mitigated concerns of an impending recession, persistently elevated inflation above the Federal Reserve's 2% target has left investors cautious that the central bank might prolong maintaining higher interest rates. Niels Christensen from Nordea added, "Powell has no need to definitively rule out more rate hikes or make firm promises about increases."

He further elaborated, "While the US economy is slowing somewhat, it is still faring significantly better than Europe, providing an advantage to the dollar." Presently, the markets are estimating an approximately 85% likelihood that the Federal Reserve will maintain its current stance in the upcoming policy meeting. However, the possibility of the central bank raising interest rates once more before the year's end has been slightly increasing.

The Japanese yen strengthened by 0.3% to 145.445 against the dollar, hovering close to the nine-month milestone of 146.565 reached the previous week. Traders remained watchful for signs of intervention, recalling that the dollar's breach of 145 yen last year prompted intervention. Speculation has arisen that Tokyo could intervene again to support its currency if the yen continues to weaken, although the threshold for such intervention might be around 155 yen.

Colin Asher, a senior economist at Mizuho, stated, "Despite nearing the FX intervention level from last autumn, it seems unlikely that intervention below USD/JPY 150 would occur. It's more probable that the pair would need to approach 155 before Japan's Ministry of Finance considers taking action." Nonetheless, both Mizuho and BofA Global Research agree that currency intervention might offer only a temporary solution to yen weakness, rather than addressing its fundamental causes.

Shifting to the Asian markets, the Chinese yuan has been a source of concern for investors, having depreciated over 5% against the dollar this year. This decline is largely attributed to apprehensions regarding China's escalating property crisis, which has further burdened the country's struggling post-pandemic economic recovery. On Wednesday, the spot yuan began at 7.2870 per dollar and ended at 7.2920.

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