NEW YORK, Jan 24 (Reuters) – The dollar edged lower against the euro on Tuesday after data showed business activity in the euro zone unexpectedly returned to modest growth in January, while U.S. business activity shrank for a seventh straight month.
While U.S. business activity shrank in January, a slump in manufacturing and services slowed for the first time since September, with business confidence picking up as the new year started.
“It looks like another piece of data that the Fed has been touting: the economy is resilient enough to do more rate hikes,” said Juan Perez, head of trading at Monex USA in Washington.
Fed funds futures see only two 25 basis point rate hikes by the Fed through June, peaking at around 5%, before starting to cut rates later in the year. The Fed itself insisted that it still had 75 basis points of hikes on the table.
“It’s clear from the PMIs that the Fed has stopped the expansion, but the economy hasn’t been hit as much as many people think,” Perez said.
Still, the dollar briefly rose against the euro after the U.S. data, but fell on the day, not far from nine-month lows hit in the previous session.
The euro rose 0.09 percent to $1.0881, just off Monday’s nine-month high of $1.0927.
Analysts said the euro was supported by survey data that bolstered the view that the euro zone economy weathered a winter of price pressures fairly well.
Euro zone business activity unexpectedly returned to modest growth in January, surveys showed, with German service sector activity expanding for the first time since June, although price pressures remained.
A stronger economy could allow the ECB to raise interest rates more aggressively in its fight against inflation.
“But if earnings and other items have a negative global impact, the euro is more vulnerable than the dollar,” Monex USA’s Perez said.
USD/JPY rose to a near one-week high before paring gains to trade down 0.44% at 130.095 yen.
The dollar fell to a low of 127.215 yen last week, its weakest level since May, ahead of the Bank of Japan’s policy review, with investors betting the central bank could signal the end of its stimulus program. However, the Bank of Japan left policy unchanged, giving the dollar some respite.
Sterling was one of the worst-performing major currencies against the dollar, down 0.34% on the day at $1.2334, after a survey showed British private sector economic activity fell at the fastest rate in two years in January.
Simon Harvey, head of FX analysis at Monex Europe, said: “Looking ahead, we expect sterling to start underperforming its European counterparts as economic data highlights a widening growth differential.”
Bitcoin, meanwhile, was little changed on the day at $22,973, stabilizing after gaining about a third in value since early January, as investors shrugged off the gloom following the high-profile crash of cryptocurrency exchange FTX.
Additional reporting by Amanda Cooper in London; Editing by Jacqueline Wong, Simon Cameron-Moore, Christina Fincher, Andrea Ricci and Mark Heinrich
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