The dollar fell against six major peers on Tuesday as US Treasury yields sank to three-month lows, with investors worrying over the Federal Reserve’s rate-hike cycle being put on pause and signs of recession in a yield curve inversion.
The US dollar index, a measure of its strength against a basket of six major currencies, dropped 0.4 percent to $96.62.
The greenback also weakened by 0.7 percent to 112.86 against the Japanese yen.
The greenback’s shortcoming comes amid a 90-day truce in the US-China trade war, which has lifted investor confidence in riskier currencies against the safe-haven dollar.
Currencies like the Chinese yuan, which have been knocked down due to the US-China trade war, is expected to improve against the dollar in the coming weeks as investor sentiment rises.
The greenback slipped 0.5 percent to 6.8402 against the yuan. The US currency on Monday shed 1.07 percent, its sharpest plunge since August 25.
Nick Twidale, chief operating officer at an FX broker, said for now, it seems China has got the best out of the G20 and they expect the yuan to remain supported. However, Twidale cautioned that markets need to see more respite in trade tensions for the risk-on rally to keep on going.
The Australian dollar, on the other hand, strengthened from the broad based dollar selling. The Aussie was up 0.3 percent to 0.7382 against its US counterpart. The Reserve Bank of Australia left its policy interest rate unchanged on Tuesday in a widely expected decision.
US 10-year Treasury Yield Hits Three-month Lows
The US 10-year Treasury note declined to 2.94 percent on Tuesday, marking its lowest level since mid-September, before it slightly rose at 2.95 percent. The difference in yield between the US 2-year and 10-year yield tightened to its smallest since July 2007.
Falling US yields are a negative for the dollar, especially versus the major currencies, said senior currency strategist Rodrigo Catril.
The curve between the 3-year and 5-year notes inverted for the first time since 2007 on Monday and was last at minus 1.2 basis points.
Investors are closely watching the 2-year and 10-year yield curve as an inversion acts as an indicator of a US recession.
Catril added that US Treasury yields are close to critical technical support levels, a break of which could further weigh on US yields and the dollar.
Fed Rate Hike
For most of the year, the greenback had been driven by strong US economy and a relatively hawkish Fed, which is widely expected to hike interest rates later this month.
Markets have estimated an 87 percent chance of a rate increase at the central bank’s December 18-19 meeting.
The dollar weakened last week when the market took Fed Chair Jerome Powell’s remarks to mean a slower pace of rate hikes.
A more dovish Fed has led markets to speculate that the rate hike cycle might not have much further to run.
Twidale stated that given data remains strong, they think the central bank will raise rates twice in 2019 and that is more than what the market is pricing in right now. They are also moderately bullish on the greenback.
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