Dollar rebounds at end of dismal week

Friday 21:00 BST. The dollar finally enjoyed some respite at the end of a week in which it slid to a two-month low against the euro as further signs that US growth was faltering clouded the outlook for Federal Reserve policy.

US stocks also rebounded after two days of losses, but a sell-off in Treasury bonds entered its fifth successive session, taking the 10-year yield to its highest level since mid-March.

Holidays across much of Europe and Asia made for relatively thin trading conditions on Friday, but in New York the S&P 500 index rose 1.1 per cent to 2,108. However, the equity benchmark recorded a weekly drop of 0.5 per cent.

Eurozone stocks came under pressure from the strengthening euro during the holiday-shortened week - most notably in Frankfurt, where the Xetra Dax fell 3 per cent over the four-day period. The pan-European FTSE Eurofirst 300 index suffered its first monthly fall of 2015 during April.

But it was the currencyand fixed income markets that saw the most extreme price action this week as the Federal Reserve acknowledged that the US economy had lost momentum and data out of the eurozone signalled that the region's recent spell of deflation had ended - bolstering recovery hopes.

Further signs of muted US growth emerged on Friday as the Institute for Supply Management's manufacturing index held steady at a near two-year low of 51.5 in April. The data came on the heels of news that US gross domestic product had grown at an extremely lacklustre 0.2 per cent annual pace in the first three months of the year.

At its midweek policy meeting, the Fed recognised the weakness in the economy, but said it reflected "transitory factors" and that the soft patch would be shortlived.

"Although expanding at a slower pace, the US economy still seems likely to grow at above-potential rates in coming quarters," said Gustavo Reis, global economist at BofA-Merrill Lynch. "Alongside expectations of firming inflation, this will probably be enough to convince the Fed to start hiking interest rates in September."

Nevertheless, the dollar was hit hard by the GDP figures and the sell-off continued through to Thursday. The dollar index, a gauge of the currency's value against a basket of peers, touched 94.6 - its lowest since late February and down 5.8 per cent from a 12-year high hit in March.

On Friday, the index rallied 0.7 per cent to 95.24, leaving it with a five-day loss of 1.7 per cent. The euro was down 0.1 per cent on the day at $1.1208, but up 3.1 per cent over the week.

"On a broad basis, we expect the dollar to be vulnerable to further weakness during the second quarter, but to resume its appreciating trend during the second half of 2015," said Pablo Breard at Scotiabank.

But the pace of the euro's rise was put in the shade by an astonishing 20 basis point increase in the German 10-year government bondyield this week to 0.36 per cent - more than 30bp up from the record low beneath 0.5 per cent hit just two weeks ago.

The move left the Bund yield only 4bp shy of where it stood just before the European Central Bank launched its quantitative easing programme on March 9 - which has driven yields lower across the eurozone, many into negative territory.

"We think the recent sell-off is all about positioning and a technical correction of a heavily overcrowded eurozone QE trade," said Nick Roberts, a fund manager at JPMorgan Asset Management. "Whilst inflation expectations have increased mildly in the past few days, the move is not material. Likewise increased growth expectations are not the cause."

The sharp move in Bunds was cited by several analysts as a key factor behind the big rise in Treasury yields, which came in spite of the weak US economic data. The 10-year US yield was up another 7bp at 2.11 per cent on Friday, taking the rise over the week to 19bp.

Chris Iggo at Axa Investment Managers, said it was as if a collective realisation had swept through the bond markets this week that negative yields just did not make sense - and that, barring some economic catastrophe, interest rates would rise over the medium term.

"Yields may not rise very much when the Fed is still unsure of when to raise rates and the ECB and Bank of Japan are still massive buyers of government debt," Mr Iggo said. "But it may be that we have seen the lows in core bond yields and that yields will move higher over time, even if not in a straight line.

The big rise in yields helped drive gold down from a three-week high hit at the start of the week. The metal was down $9 at $1,175 on Friday, $4 lower for the week.

Brent oil ended the week at $66.46 a barrel, down 32 cents from Thursday's settlement, which was the highest this year. Over the week, the crude benchmark rose $1.18, or 1.8 per cent.

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