Market News

* U.S. jobless claims fall, but slowdown emerging

* Fed's Powell speaks before Congress for 2nd day 

* European PMIs come in softer than expected 

(Adds comments, U.S. data, FX table, byline, updates prices) 

By Saikat Chatterjee and Gertrude Chavez-Dreyfuss 

LONDON/NEW YORK, June 23 (Reuters) - The euro fell across the board on Thursday as weaker-than-expected German and French PMI data confirmed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big interest rate hikes from the European Central Bank.

 High prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 when the coronavirus pandemic was taking hold, with S&P Global's headline factory Purchasing Managers' Index (PMI) falling to a near two- year low of 52.0 from 54.6. "The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. 

The ratio has sharply dropped relative to the U.S.," said Mazen Issa, senior FX strategist in a research note. "This dynamic is typically consistent with further U.S. dollar resilience. This could be bolstered as recession fears mount," he added. Following the data, money markets priced in about 30 basis points (bps) of rate hikes in July compared to 34 bps on Monday. Traders also trimmed their expectations of how much the ECB will hike rates by the end of 2022 to 161 bps compared to 176 bps on Monday. Against the U.S. dollar, the single currency declined 0.4% to $1.0522.

It earlier declined below a key $1.05 level for the third time this week. The euro also declined 1.6% versus the Japanese yen The euro's losses pulled the dollar away from earlier lows and sent the greenback into positive territory against its rivals after cautious comments by Federal Reserve Chair Jerome Powell on Wednesday weighed on sentiment. The dollar index inched higher to 104.34, up 0.1%. While markets have steadfastly held to the view the Fed is on track to raise interest rates by another hefty 75 bps in July, some analysts believe the ECB and the Bank of England will adopt a softer rate increase path or risk damaging growth.

Fed Chair Jerome Powell said on Wednesday a recession was "certainly a possibility," reflecting fears in financial markets that the Fed's tightening pace will throttle growth. The Fed chief also testified on Thursday before the House of Representatives, reiterating its commitment to fight inflation. "As long as there is a debate over whether a recession will happen, there will be downward swings for the stock market that will ultimately boost the buck as a safe haven," said Juan Perez, director of trading at Monex USA in Washington.

Since the beginning of the year amid the turmoil over Ukraine and the slide on Wall Street, with the S&P 500 down 20%, the dollar index has gained 9%. "President Joe Biden sounded positive in the face of challenges a la Fed Chairman Jerome Powell. A recession isn't in their minds and should not necessarily be the conclusion the public should reach following promises to contract monetary policy," Perez added. 

Against the yen, the dollar dropped 1% to 134.84 yen, retreating further away from a 24-year high hit earlier this week. U.S. data showed that the number of Americans filing new claims for unemployment benefits edged down last week as labor market conditions remained tight, though a slowdown is emerging. Initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 229,000 for the week ended June 18. 

Economists polled by Reuters had forecast 227,000 applications for the latest week. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March. The dollar index slipped following the U.S. data.