Dollar recovers from six-month low after year-end sell-off

NEW YORK (Reuters) - The dollar recovered from a six-month low to rise 0.46% on Thursday, the year’s first trading day, after a downbeat December that left the index virtually flat at the end of 2019.

FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/

Bleak data out of Germany and the United Kingdom weakened the euro and pound as demand for the safe-haven dollar picked up. Thursday’s data and dollar move broke with trends in December when the greenback fell as tensions with China eased and global growth prospects rose.

“The trend of the weaker dollar that we saw generally in December seems to have broken down a bit today,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.

“Data in the UK and Europe really just weren’t impressive and so you’ve got this return of concerns that 2020 may not be as good for growth on the continent and in the UK as people were surmising as recently as a few weeks ago.”

British factory output fell in December at the fastest rate since 2012, a survey showed on Thursday, while a German Purchasing Managers’ Index survey also out on Thursday showed the manufacturing sector contracted further in December.

The euro slipped 0.39%, to $1.117, from Tuesday when it hit the highest level since early August. Against the dollar, the pound was 0.87% weaker at $1.314.

Wizman, however, said he expected the dollar’s gains to be short-lived.

“We think the trend is still towards a weaker dollar against the majors overall in 2020. That’s supported in part by the view that global growth will resume and that’s going to be good for the non-dollar blocs,” he said.

Trading is likely to remain thin until next Tuesday, when most European countries open after Monday’s Epiphany holiday. But market players will be relieved that the dollar navigated the holiday period without experiencing the money market squeezes many had feared.

The dollar index slumped 0.4% on New Year’s Eve as large banks took only a small portion of the $150 billion offered by the U.S. Federal Reserve’s overnight repo operation and borrowing costs fell to the lowest level since March 2018.

Graphic: The Fed dives into the repo market,

Though the Fed’s liquidity injections have reduced the risk, worries remain about a possible repeat of last January’s so-called flash crash, when stop-loss selling in thinly traded currency markets drove a dramatic surge in the Japanese yen, which swung nearly 4 yen against the dollar in the largest intraday move in more than two years .

Reporting by Kate Duguid and Sujata Rao; Editing by Will Dunham and Richard Chang