Dollar gains after GDP contraction
NEW YORK: The US dollar rallied against major currencies on a data-packed Wednesday after a report showed the world's largest economy shrank in the first quarter, worse than market expectations, but better than the dire predictions touted by some of the biggest US banks.
Gross domestic product (GDP) fell 0.3% in the quarter, a Commerce Department report showed in its first estimate, undermined by a surge in imports trying to front-load purchases ahead of the Trump administration's implementation of tariffs on most goods.
Data showed that pre-tariff imports surged 41.3% in the first three months of the year. The consensus forecast was for a 0.3% rise, according to economists polled by Reuters. Goldman Sachs, however, had forecasted a 0.8% contraction, while J.P. Morgan predicted a 1.75% fall.
The first-quarter GDP drop followed a 2.4% rise in the fourth quarter. Consumer spending, however, continued to grow, though at a moderate pace. Consumer spending on services - especially health care – grew 2.4% in the first quarter as households remained resilient.
'It's important to realize that a large chunk of the fall in GDP is due to the sharp increase in imports, which take away from GDP growth,' said Oliver Pursche, senior vice president, advisor, at Wealthspire Advisors in Westport, Connecticut.
'And that's probably due to the expectation of tariffs. So, if you were to normalize that, you end up with positive GDP growth for the quarter, but it certainly doesn't bode well for Q2.'
Following the data, the dollar climbed versus the yen to trade 0.4% higher at 142.96 yen, while the euro slid 0.3% to $1.1351.
The greenback was on pace for its biggest monthly decline against the yen since July 2024. Europe's shared currency, on the other hand, was on track to post its largest monthly gain since November 2022.
Sterling fell 0.6% to $1.3332. For the month of April, the British pound rose 3.8%, its heftiest rise against the dollar in 2-1/2 years.
A separate report showing a rise in US consumer spending and income and slowdown in annual inflation also boosted the dollar. Data showed US personal income increased 0.5% in March and spending climbed 0.7%, which were both above economists' forecasts in a Reuters poll.
In the 12 months through March, the Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, increased 2.3%, down from 2.7% in February. Annual core inflation also eased from the prior month, rising 2.6% after advancing 3.0% in February. On a monthly level, both the headline and core PCE numbers were unchanged from the previous month. 'The almost unchanged level of core PCE prices in March is welcome news but, given the data precede the implementation of broad-based tariffs, core inflation will inevitably rebound sharply in the coming months,' said Harry Chambers, assistant economist at Capital Economics.
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