Dollar index weakens as soft data backs US recession outlook

The U.S. dollar fell on Thursday as weak data reinforced expectations the world's largest economy is likely headed toward recession, further supporting the view that the Federal Reserve could pause in June after another expected rate hike next month.

The greenback hit session lows against the yen and euro after data showed higher weekly jobless claims, a precipitous drop in mid-Atlantic business activity, and lower existing home sales.

But comments from Cleveland Fed President Loretta Mester saying that the U.S. central bank still has more interest rate increases ahead helped the dollar cut its losses. She noted, however, that the Fed's rate hikes over the last year to quash high inflation is nearing its end.

Her comments came a day after New York Fed President John Williams said inflation was still at problematic levels and the U.S. central bank would act to lower it.

"The rhetoric coming from the Fed...is that they're looking to keep rates higher for longer," said Alvise Marino, macro strategist, at Credit Suisse in New York.

He added though that with the U.S. data, "we could see loss of interest rate support for the dollar," noting that "the market has a pretty aggressive view that the Fed is going to be cutting rates this year."

Thursday's data showed U.S. initial claims rose modestly to 245,000 in the latest week, while the week before was revised to show 1,000 more claims than previously reported.

A separate report from the Philadelphia Fed showed its measure of factory activity in the mid-Atlantic region plunged to the lowest level in nearly three years in April. Manufacturers in the region expected activity to remain subdued over the next six months.

It's not much different in the U.S. housing sector. Existing home sales slid 2.4% to a seasonally-adjusted annual rate of 4.44 million units last month. They had increased in February for the first time in a year.

"It's increasingly clear that the U.S. economy is headed for recession. It's just a matter of time," said Erik F. Nelson, macro strategist at Wells Fargo Securities in London.

"A U.S. recession would be bad for the dollar. If the U.S. is leading the world into recession, it's hard to see a big demand for the dollar."

U.S. rate futures have priced in a nearly 90% chance of a 25 basis-point rate increase next month, and a roughly 69% probability of a pause in June .

In afternoon trading, the dollar index, which tracks the greenback's value against a basket of major currencies, slipped 0.1% to 101.84 after sliding on Friday to its lowest since early February.

So far this year, the dollar index has fallen 1.6% after sharp gains of more than 8% in 2022.

Against the yen, the dollar sank 0.3% to 134.30 yen . It fell 0.5% versus the Swiss franc to 0.8934 francs .

The euro was flat at $1.0962, not too far from a one-year high touched last week against the dollar.

The European Central Bank is expected to raise rates for a seventh straight meeting on May 4, lending support for the euro. Policymakers are converging on a 25-bps hike, even if a larger move is not yet off the table.

Elsewhere, sterling slipped 0.1% to $1.24, moving away from a 10-month high of $1.2545 touched on Friday. Hotter-than-expected CPI figures in Britain boosted bets for a rate increase from the Bank of England in May.