NEW YORK - The U.S. dollar pared gains against a basket of currencies on Friday after data showed U.S. business activity nearing a standstill in September, while the yen slumped after the Bank of Japan (BOJ) kept interest rates in negative territory.
S&P Global said its flash U.S. Composite PMI index, which tracks the manufacturing and service sectors, dipped to a reading of 50.1 in September from a final reading for August of 50.2. September's result was barely above the 50 level that separates expansion and contraction.
The U.S. economy so far this year has defied projections for sliding into a recession that most economists had expected would be triggered by the Federal Reserve's aggressive interest rate increases aimed at quelling inflation.
"A modest chunk of weakness but weakness nonetheless," said Michael Brown, market analyst at Trader X, said of the U.S. data.
"I wonder whether the PMIs are the first chink in the U.S. exceptionalism narrative which is giving USD bulls a convenient excuse to take some profit after what looks set to be a 10th straight weekly advance," Brown said.
The U.S. dollar index - which measures the currency against six major counterparts - was about flat on the day at 105.41 after having risen as high as 105.78, earlier in the session. A close above 105.34 would mark the 10th straight week of gains for the index, its longest winning streak in nearly a decade.
The U.S. central bank needs to raise interest rates further to control inflation in a "timely way," Federal Reserve Governor Michelle Bowman said on Friday in remarks that sketched out a hawkish argument based on a potential rise in energy prices and a possibility the inflation battle may take years to complete.
The Federal Reserve left interest rates at 5.25% to 5.5% on Wednesday but stressed that it would hold them at that level for as long as needed to push inflation back to 2%.
The yen fell Friday after the Bank of Japan (BOJ) kept interest rates in negative territory days after the Federal Reserve signalled U.S. borrowing costs would stay high, piling pressure on the Japanese currency.
The BOJ held interest rates at -0.1% on Friday and reiterated its pledge to keep supporting the economy until it is confident inflation will stay at the 2% target.
"We have yet to foresee inflation stably and sustainably achieve our price target," BOJ Governor Kazuo Ueda told a news conference.
The yen dropped as low as 148.42 to the dollar, nearing the 150-mark at which analysts have said government intervention to prop up the currency is likely. The dollar was last up 0.36% at 148.115 yen.
"I think it's rather dovish, and that's why we've seen the yen go past 148," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Speculation that Tokyo could intervene to support the yen gathered steam. Japan's Finance Minister Shunichi Suzuki said on Friday he would not rule out any options, warning against a yen sell-off that would hurt the trade-reliant economy.
Lacklustre U.S. data comes on the heels of disappointing data from Europe.
The euro came under pressure earlier on Friday after survey data showed that economic activity in France fell much more quickly than expected in September.
Separate survey data covering the whole euro zone showed that the economy likely contracted in the third quarter.
"We think the probability of the single currency falling to its year-to-date lows is high alongside the recession risk on the continent," said Simon Harvey, head of FX analysis at Monex Europe. The euro's low for 2023 was $1.0482 in January.
Meanwhile, sterling was 0.19% lower at $1.2272 after data showed that the UK economy slowed sharply in September and is likely on the brink of recession.
It was near the roughly six-month low of $1.22305 it hit on Thursday when the Bank of England (BoE) halted its long run of interest rate increases, a day after Britain's fast pace of price growth unexpectedly slowed.
(Reporting by Saqib Iqbal Ahmed; additional reporting by Harry Robertson in London, Rae Wee in Singapore; Editing by Christopher Cushing, Sonali Paul, Christina Fincher, Sharon Singleton)