January 30, 2020 / 4:13 PM / 25 days ago

FOREX-Weak U.S. data ends the dollar's safe-haven rally

(New throughout; changes dateline, previous LONDON)

By Kate Duguid

NEW YORK, Jan 30 (Reuters) - The U.S. dollar fell on Thursday on news that the American economy posted its slowest annual growth in three years in 2019 and personal consumption weakened dramatically, ending the currency’s rally on safe-haven demand from investors nervous about the economic fallout of the coronavirus.

The dollar index had gained 0.65% in the last two weeks as investor sold off risk assets on coronavirus fears. Those fears persisted on Thursday morning, boosting the Japanese yen and Swiss franc, but the U.S. economic data was bleak enough to depress the dollar’s safe-haven appeal. The index was last trading down 0.18% on the day at 97.818.

The American economy missed the Trump administration’s 3% growth target for a second straight year as the slump in business investment deepened amid damaging trade tensions, the Commerce Department reported on Thursday.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8% pace after rising at a brisk 3.2% rate in the third quarter. Personal consumption expenditures (PCE) factor into the Federal Reserve’s policymaking, and expectations of an interest rate cut in March rose from 7.2% yesterday to 17.7% today, according to CME Group’s FedWatch tool.

The odds that interest rates will still be at 150-175 basis points in July fell from 44.3% yesterday to 38.2% today.

“Fundamentally, if you look at today’s GDP report and the impact that it had on the dollar, you had downward pressure being exerted because of the sharply lower-than-expected PCE print. That hurt quite badly, given that is a key input into the Fed’s reaction function,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.

“The overall weakness below the headline number is indicative of a relatively sharp deceleration in the U.S. economy,” he said, and raises the odds of one more insurance cut this yet.

The Japanese yen and the Swiss franc gained as the rising death toll from the coronavirus, which has now spread to more than 8,100 people globally, surpassing the 2002-2003 SARS epidemic’s total.

The yen was last up 0.3% to 108.66 while the Swiss franc was up 0.49% to 0.968.

The Chinese yuan in the offshore market, a barometer of risk sentiment towards Chinese assets as mainland and Hong Kong markets are shut, tumbled to a one-month low, breaking through the technically significant 7 yuan per dollar level. It was last 0.46% weaker to 7.001.

Reporting by Kate Duguid and Saikat Chatterjee Editing by Nick Zieminski

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