GDP takes a tumble; dollar follows

April 29, 2015 09:58 AM

The dollar dropped to an eight-week low on Wednesday after data showed the U.S. economy grew much more slowly than expected in the first quarter, reinforcing expectations for a gradual pace of interest rate rises by the Federal Reserve.

Benefiting from the dollar's losses, the euro climbed to an eight-week peak, buoyed by data that showed a euro zone recovery gathering pace.

The dollar index, a gauge of the greenback's value against six major currencies, plunged to its lowest level since early March. It fell for a sixth consecutive day.

Data on Wednesday showed the U.S. economy grew just 0.2% in the first quarter, down sharply from the fourth quarter's 2.2% clip and the weakest reading in a year. The first-quarter reading was also much lower than market expectations for 1.0% growth.

"Any hopes of a June rate hike were dashed (after the data)," said London-based Craig Erlam, senior market analyst at OANDA. "Even September is looking less likely at this stage, although we can't forget that a number of factors have played into this poor reading, some of which are temporary."

In midmorning trading, the dollar index was down 0.4% at 95.675. It dropped as low as 95.448, an eight-week trough. The greenback also slid to an two-month low versus the Swiss franc, and was last down 0.6% at 0.9499 franc.

The euro, meanwhile, rose above $1.10, last trading at $1.1033, supported by data showing lending to euro zone households and companies rose in March for the first time in three years.

In addition, news that Greece was expected to present draft reform legislation to international lenders on Wednesday in a bid to show it is serious about acting on pledges to secure aid also helped shore up sentiment. German bund yields inched higher, as a result, lifting the euro. 

Focus now shifts to the statement the Fed will issue on Wednesday afternoon when it concludes its two-day monetary policy meeting. Investors expect it to adopt a more dovish tone.

The Fed is widely expected to keep policy unchanged and the focus will be on its economic assessment. The central bank meeting has come as the U.S. economy has hit a soft patch, blamed largely on harsh winter weather, a strong dollar and disruptions at West Coast ports.

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