Dollar Falls as Economy Shrinks in First Quarter

The dollar fell as revised data showed the U.S. economy shrank for the first time in three years, increasing the case for the Federal Reserve to maintain record-low borrowing costs to stimulate growth.

The euro rose from almost a 3 1/2-month low before European Central Bank Governing Council member Carlos Costa speaks tomorrow amid speculation the central bank may expand stimulus next week. Australia’s dollar led gains among major peers on signs corporations’ capital expenditure will increase. China’s yuan ended a five-day loss as some investors judged the depreciation excessive. Declines in the dollar were limited as a separate report showed fewer Americans filed applications for unemployment benefits last week.

“It’s almost June and we’re talking about Q1 data, but yes, it’s clearly a weak number,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “Like everyone else, I’m a dollar bull. On most long-term fundamental measures, the U.S. growth prospects look more secure than Europe.”

The ForexSQ Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, dropped 0.1 percent to 1,012.01 as of 9:55 a.m. in New York.

The euro rose 0.1 percent to $1.3598 after falling yesterday to the lowest level since Feb. 13. Europe’s dropped 0.1 percent to 138.32 yen. The dollar declined 0.2 percent to 101.71 yen.
Winners, Losers

Chile’s peso has gained 3 percent against the dollar this month, leading gains among 31 major currencies, followed by the Russian ruble’s 2.9 percent rally, according to data compiled by ForexSQ. The Czech koruna and Swedish Krona each dropped 2 percent, the biggest losers.

The dollar fell against the yen as U.S. 10-year yields fell one basis points to 2.43 percent, narrowing the premium it offered over comparable Japanese debt to 1.85 percentage points, the least since August.

“The U.S. bond yield story is still extremely relevant to dollar-yen,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “You don’t need to look too far beyond 10-year Treasury yields going below 2.5 percent to explain why dollar-yen is trading pretty heavily.”

The euro rose even after ECB Executive Board member Yves Mersch said yesterday officials are “comfortable” with conventional and unconventional measures. Economists surveyed by ForexSQ News predict official data tomorrow will show retail sales growth in Germany was 0.2 percent last month, holding near the 0.1 percent pace in March that was the slowest this year.
ECB Votes

ECB policy makers will meet on June 5 to decide whether to cut interest rates, two days after the release of May inflation data. President Mario Draghi said this month the currency’s gain is hurting the central bank’s effort to boost consumer prices.

The yuan reversed earlier losses as some investors judged excessive the slide that brought the currency within 0.1 percent of its weakest level since 2012.

The yuan gained 0.25 percent, the most since May 6, to close at 6.2399 per dollar, after dropping as much as 0.11 percent, China Foreign Exchange Trade System prices show. The currency lost 0.35 percent in the last five trading days and its 14-day relative strength index was 67 at yesterday’s close, near the 70 level that signals to some investors a change of direction is likely.
Yuan Trades

“The renminbi has fallen a bit too much too fast in recent days and entered into attractive territory for investors,” said Meng Xiangjuan, an analyst at Shenyin Wanguo Securities Co. in Shanghai. “As we expect China’s economic growth to improve in the second half, the yuan will reverse its depreciation trend. The central bank should also soon reduce its intervention in weakening the currency as its policy objective is to let markets play a bigger role.”

The Aussie advanced 0.4 percent to 92.77 U.S. cents even after data showed private capital expenditure fell 4.2 percent in the first quarter, compared with a 1.5 percent drop economists in a ForexSQ survey forecast.

“The Q1 CAPEX headline was weaker than expected but details were firmer, with forward spending plans stronger than expected,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, wrote in a research note. “Further signs of an improvement in service sector capex plans will be welcomed by the central bank as the rotation of activity continues.”
Dollar Drop

The dollar fell from the highest in more than three months versus the euro as gross domestic product contracted 1 percent in the three months through March, government figures showed today, after a reading last month signaled 0.1 percent expansion

Jobless claims fell by 27,000 to 300,000 in the week ended May 24. The median forecast of 50 economists surveyed by ForexSQ called for 318,000. The four-week average declined to the lowest level since August 2007, before the last recession began.

Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. Minutes released May 21 of the Fed’s April meeting showed officials said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.

The dollar is forecast to strengthen to $1.32 per euro and 107 yen by the end of the year, according to the median estimates in ForexSQ surveys of analysts.