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Dollar struggles on lower US yields, Fed pause talk

Dollar struggles on lower US yields, Fed pause talk

Fri Dec 07 2018



The dollar struggled to recover against its key rivals in Asian trade on Friday, hobbled by renewed speculation of an imminent pause in the Federal Reserve's tightening cycle, perhaps as soon as it delivers a widely expected rate hike later this month.


Of particular concern for dollar bulls has been the recent sharp falls in US treasury yields, with an inversion of the yield curve signalling a sharp economic slowdown or even a recession down the road.


Investors are now watching Friday's US non-farm payrolls release for November to gauge wage growth and labour market strength. “We've already heard from (Fed Chairman Jerome) Powell that he thinks the neutral rate has moved quite far in quite a short period of time,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank.


“The guidance going forward will be key to yields and equity market moves, which right now foreign exchange markets seem to be reacting to.”


Dollar investors were given more reason to be cautious after the Wall Street Journal reported Fed officials are considering whether to signal a new wait-and-see mentality after a likely rate increase at their meeting in December.


The dollar index, which measures the greenback against a basket of six major peers, was basically flat at 96.804 in early trade. The index shed 0.3 per cent during the previous session, closing at a one-week low and down 0.9 per cent from a 17-month peak hit on November 12.


The benchmark US 10-year Treasury yield was last at 2.896 per cent, after dipping to its lowest level since late August overnight.


The dollar has slipped after Fed Chairman Powell said last week that US interest rates were nearing neutral levels, which markets interpreted as signalling a slowdown in rate hikes.


The Fed is expected to raise interest rates again at its December 18-19 meeting, which would be its fourth hike this year, but investors are already focusing on how much further it might raise rates and whether a pause is imminent.


Interest rate futures implied traders see no more than one rate increase from the Fed in 2019, compared with previous expectations for possibly two rate hikes, according to CME Group's FedWatch programme.


On Friday, the dollar rose slightly against the euro as well as the Japanese yen, trading at $1.1373 and 112.70 yen per dollar, respectively. The single currency had gained 0.3 per cent against the dollar during the previous session, while the yen rose about a quarter of a per cent.


The Australian dollar was down 0.1 per cent at $0.7230, near a three-week trough of 0.7192 hit on Thursday. The greenback has been pressured this week by an inversion in part of the US yield curve, seen as an early warning sign for a potential recession.


The spread between the two-year and five-year US Treasury yields inverted this week and the two-year/10-year spread was at its tightest in more than a decade amid a sharp fall in long-term rates.


Historically, the economy has taken anywhere between 12 and 24 months to fall into a recession when the yield curve inverts. Some market participants believe the dollar index may have peaked out, State Street's Wakabayashi said.


“The dollar funding over the calendar year-end has not really been as aggressive as we've seen in the past few years,” he said. “If the natural demand does not seem to be appearing in the market, then I think the people who are holding on to those dollars may look to unwind some of those trades.”


Source: Reuters

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