Dollar edges lower after Fitch downgrade; economic data points to recovery

The U.S. dollar slipped lower in volatile European trade Wednesday, as traders digested Fitch’s downgrade of its U.S. sovereign rating as well as relatively strong economic data.

At 03:05 ET (07:05 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 101.983, but remained close to three-week highs.

Dollar slips on Fitch downgrade
The dollar has traded in a shaky manner Wednesday after Fitch became the second rating agency, after Standard & Poor’s, to downgrade the U.S. government’s credit rating to AA+ from the top tier AAA, citing likely fiscal deterioration over the next three years and repeated fraught debt ceiling negotiations.

Fitch had first mentioned the possibility of a downgrade in May, but the move late Tuesday came as something of a surprise given it chose to maintain its position in June after the debt ceiling crisis was resolved.

Still, the impact has been relatively minor, with some investors choosing to react to this hit to risk sentiment by buying U.S. sovereign debt, helping the dollar.

“The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information… should have little direct impact on financial markets,” Goldman Sachs analysts said in a note.

The greenback had previously been in demand as signs of a manufacturing recovery, coupled with improved construction activity, increased confidence that the U.S. economy will avoid a recession this year. Such a scenario could provide the Federal Reserve with enough headroom to keep raising interest rates.

Sterling dips; BOE set to hike again
GBP/USD traded 0.1% lower at 1.2769, continuing Tuesday’s weakness on the back of data showing British factory output contracted in July at the fastest pace in seven months.

The aggressive monetary tightening by the Bank of England is clearly having an impact on the British economy, but the BOE is still widely expected to hike interest rates once more on Thursday, in what would be the 14th consecutive time, given inflation remains elevated.

Euro edges higher, for now
EUR/USD rose 0.1% to 1.0994, after earlier touching a session-high of 1.1020.

The euro has traded on the soft side recently, not helped by the final euro zone manufacturing Purchasing Managers’ Index falling on Tuesday to its lowest level since May 2020.

This followed data earlier this week showing euro zone inflation fell further in July, offering the European Central Bank reasons to end its severe run of interest rate hikes. That said, at 5.3%, annual CPI still remains considerably above the bank’s 2% medium-term target.

Yen rebounds after steep losses
USD/JPY fell 0.4% to 142.69, with the Japanese yen rebounding after steep overnight losses, with the focus remaining on the Bank of Japan’s bond buying operations, after the bank announced more flexibility in its yield curve control mechanism.

AUD/USD fell 0.5% to 0.6571, with the Australian dollar extending losses after the Reserve Bank kept interest rates on hold this week, while USD/CNY rose 0.1% to 7.1836, amid some disappointment over the lack of concrete details of stimulus measures from the government.