The euro and sterling slumped against the dollar on Friday after surveys showed the downturn in business activity across the euro zone and Britain deepened this month and the economies were likely entering a recession.
Early this morning, UK PMI data revealed that the British economy’s decline grew worse this month as businesses struggled with rising prices and weakening demand.
The euro fell 0.9% to $0.9755, following the direction of the pound, after earlier reaching $0.9726, its lowest point since October 2002.
Data showing that S&P Global’s flash euro zone composite purchasing managers’ index (PMI), seen as a reliable indicator of overall economic health, continued to decline in September were a contributing factor in the decline. German economic activity shrank even more as increased energy costs impacted the biggest economy in Europe and businesses experienced a decline in new business.
The common currency of Europe was expected to experience its biggest weekly percentage decline since March. After Japanese authorities intervened in markets on Thursday to strengthen the currency for the first time since 1998, the yen was down 0.5% at 143.14 to the dollar but was likely headed for its first weekly gain in more than a month.
On hearing that Japan had purchased yen to support the damaged currency, the yen surged by more than 1% on Thursday. Due to a public holiday in Japan, trading was light on Friday. The dollar index, which compares the value of the dollar to a basket of currencies including the euro, pound sterling, and yen, rose to a record high of 113.44, surpassing previous two-decade highs reached earlier this week. It is expected to have its best week since March 2020. It was recently up 1% at 112.38.
Sterling posted its biggest weekly decline against the US dollar in 2 years after it touched a fresh 37-year low of US$1.0840. The pound was the day’s biggest loser against the dollar, down 3.4 per cent at US$1.0874, and also had its largest daily percentage loss in 2 years.
British bond yields also surged on Wednesday as prices sank. Benchmark UK 10-year yields soared to 3.829 per cent, a level not seen since April 2011.
Europe’s shared currency had its worst weekly performance since March 2020.
The yen was 0.6 per cent lower at 143.30 per US dollar, but had its first weekly gain of 0.3 per cent in more than a month after Japanese authorities intervened in markets on Thursday to support the currency for the first time since 1998.
The yen rallied more than 1 per cent on Thursday on news Japan had bought yen to defend the battered currency. Trading was thin on Friday with Japanese markets closed for a public holiday.
The dollar index, which measures the US currency against a basket of currency including euro, sterling and yen, surged to 113.23, its highest since May 2002 and topping 2-decade highs hit earlier this week. It was last up 1.6 per cent at 112.96, posting its best largest weekly percentage rise since March 2020.
“The buck is indeed a safe haven unlike any other time in recent decades because the war and its effects are not affecting the US domestic goals,” said Juan Perez, director of trading at Monex USA in Washington.
The Bank of England lifted interest rates by 50 basis points on Thursday in an attempt to tackle inflation but, like previous rate hikes in recent months, the move failed to support the pound as it was overshadowed by concerns about the economy.
The dollar received a boost this week from a very hawkish Federal Reserve policy announcement and rising Treasury yields.