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.
"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.
"The challenge for the market here is, how far in advance do you want to price that? It's challenging to price that in the rates and FX markets if the Fed is going to continue to hike."
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 on Thursday 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.
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.
That tied in with expectations of economists in a Reuters poll for the Fed to deliver a final 25 bps interest rate increase in May, and then hold rates steady for the rest of 2023.
The dollar index, which tracks the greenback's value against a basket of major currencies, eased 0.1% to 101.87 after sliding on Friday to its lowest level since early February.
So far this year, the dollar index has fallen 1.8% after sharp gains of more than 8% in 2022.
Against the yen, the dollar sank 0.3% to 134.30 yen. The U.S. unit rose above 135 for the first time in a month on Wednesday.
A U.S. recession would dollar-negative, said Wells Fargo's Nelson. "If the U.S. is leading the world into recession, it's hard to see a big demand for the dollar," he added.
The euro gained 0.1% to $1.0961.
Comments from Fed and ECB policymakers also supported the euro and the dollar.
Fed Bank of New York President John Williams said on Wednesday inflation was still at problematic levels, and the U.S. central bank would act to lower it.
In the euro zone, ECB policymaker Klaas Knot said inflation is still too high and a "sufficiently restrictive stance" is needed.
The ECB is expected to raise rates for a seventh straight meeting on May 4, with policymakers converging on a 25-bps hike, even if a larger move is not yet off the table.
Elsewhere, sterling rose 0.2% to $1.2464, not far from a 10-month high of $1.2545 touched on Friday. Hotter-than-expected CPI figures in Britain that boosted bets for a rate increase from the Bank of England in May.