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Dollar retreats on recession fears; U.S. PPI data due later

By Peter Nurse - The U.S. dollar weakened in early European trade Friday as fears that the U.S. economy was heading towards recession mounted, ahead of next week’s crucial Federal Reserve meeting.

At 02:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.1% to 104.688, after falling 0.3% overnight.

Initial jobless claims increased moderately last week, data showed on Thursday, while continuing claims rose to a 10-month high, adding to fears that the world's largest economy may slide into recession next year.

A number of influential bank leaders warned this week of the likelihood of the U.S. economy slowing down dramatically, and this along with last month’s data showing that U.S. consumer prices had risen less than expected in October has weighed heavily on the dollar.

The dollar index has fallen nearly 7% this quarter, putting it on track for the largest quarterly decline since 2010.

“Preventing an even large dollar correction this month is the fact that Fed expectations have not yet crumbled. The terminal rate is still priced above 4.90% for next spring and this is just about keeping US two-year Treasury yields above the 4.25% area,” said analysts at ING, in a note.

However, this could still change with more U.S. inflation data due later in the session, in the form of the November PPI release. This is expected to have climbed 0.2% on the month in November, an annual rise of 7.2%, which would be a drop from 8.0% the prior month.

This comes ahead of next week’s closely-watched consumer inflation data, with any downside surprise likely to trigger another dollar selloff, and the final Fed policy-setting meeting of the year.

EUR/USD rose 0.1% to 1.0567, with the euro benefiting from the dollar selloff ahead of next week’s European Central Bank meeting.

The ECB is also likely to slow the pace of its aggressive interest rate hikes, having raised rates by a total 200 basis points since July, but with Eurozone CPI still at double figures the central bank will need to continue hiking for some time.

GBP/USD rose 0.1% to 1.2242, with the Bank of England set to announce its monetary policy decision next week, with another interest rate increase of 50 basis points expected.

Meanwhile, the Office for National Statistics said on Friday that it was canceling the release of next week’s U.K. PPI data, after the discovery of further potential problems with the calculation of the series.

USD/JPY fell 0.2% to 136.38, with the yen benefiting from growing expectations that the Bank of Japan could end its ultra-easy monetary policy with inflation around 40-year highs.

AUD/USD traded flat at 0.6767, while USD/CNY fell 0.2% to 6.9529, with the yuan being Asia’s best-performing currency in the region this week after China scaled back several anti-COVID movement curbs and testing measures.

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