Economic deflation fears support the dollar, and the Australian dollar falls to its lowest level in two years

US dollar banknotes are shown in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/File Photo

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LONDON (Reuters) – A dismal rally on the global economic outlook lifted the safe-haven dollar on Friday and pressured risk-sensitive currencies, with the Australian dollar dropping to a two-year low.

Rampant inflation and a rush by central banks to raise interest rates and stem the flow of cheap money has led to a sell-off in the markets and jack up assets seen as safer bets.

New data on Friday showed that euro zone inflation hit another record in June, while separate statistics showed that manufacturing production in the bloc fell for the first time in two years. Read more

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The dollar index – which measures the greenback against six peers – is on track for a weekly gain of nearly 1%, last up a quarter of a percent on the day at 105.020.

“It’s a risk-free start to the second half of the year with stocks and commodities lower, so the dollar is pretty much stronger across the board,” said Kenneth Brooks, currency strategist at Societe Generale in London. “The Fed is committed to keeping inflation under control, but can it achieve a smooth landing?”

The US Federal Reserve has raised interest rates by 150 basis points since March, with half of that arriving last month in the central bank’s largest increase since 1994. The market is betting on the same volume at the end of this month.

The odds are very low that the US could slide into recession without dragging the rest of the world with it, strategists at RBC Capital Markets said in a note.

The most risk-sensitive currencies fell across the board. The Australian and New Zealand dollars alike fell more than 1% on the day, with the Australian dollar dropping as much as 1.6% to $0.67905, its lowest level since June 2020.

The Reserve Bank of Australia decides policy on Thursday, and markets are expecting a half-point hike on the key rate. But that didn’t help the Australian dollar much, which instead tracked commodity prices lower as the global economic outlook deteriorated.

Sterling fell 0.8% to $1.20,770, a day after official data showed a record drop in Britain’s current account deficit in early 2022. Read more

The euro was down 0.5% at $1.04330. The last drop was 0.3% at $1.04,545.

The European Central Bank is expected to raise interest rates this month for the first time in a decade, although economists are divided over the size of any increase.

The Japanese yen is up as much as 0.75% on the day, pulling away from a mid-week low of 137.00 – a 24-year low. It rose last quarter of a percent to 135,415 yen to the dollar.

In the cryptocurrency, Bitcoin resumed its downward slide, falling 2% to trade just above $19,000.

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(Ian Weathers reports), Additional reporting by Sikes Chatterjee in London and Kevin Buckland in Tokyo; Editing by Alex Richardson

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