Dollar Index Nears 2.5-week Peak, Trade tension Looms
Dollar Index: On Tuesday, the dollar was steady near a 2.5 week high, with the support of higher U.S –yields and its safe-haven status. There are also growing worries that the U.S-China trade war could worsen following Washington’s crackdown on China’s Huawei Technologies.
The dollar index against a basket of six major currencies was a shade higher at 97.965 after brushing 98.036 overnight, its highest since May 3.
Global equities took a hit this week, with share prices in chipmakers falling in the wake of the U.S moves against Huawei.
“The dollar has established itself as a safe haven, and it attracts demand in times like this, with equities falling and market volatility rising,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.
“The bounce by Treasury yields is another factor supporting the dollar. The recent drop by the 10-year yield seemed overdone, and with Fed’s Powell not providing clear hints of a rate cut this year, the rebound in yields could continue for a while.”
On Monday, Fed Reserve chairman Jerome Powel said that it was premature to make a judgment about the impact trade and tariff issues could have on monetary policy.
The 10-year Treasury note yield extended its overnight rebound and brushed an eight-day high of 2.428%. The yield had dropped to 2.354% last week, its lowest since March 28, after weak U.S. retail sales data increased rate cut expectations.
“Among industrialised nations, only Italy has a higher 10-year yield than the United States. Under such conditions, buyers have little choice but to turn to the dollar,” said Daisuke Karakama, chief market economist at Mizuho Bank.
The 10-year Italian government bond yielded 2.705%, driven up by domestic political uncertainty and the country’s rising debt. The 10-year German and Japanese yields stood at minus 0.088% and minus 0.05%, respectively.
The euro was flat at $1.1165 after slipping to $1.1150 the previous day, its lowest since May 3. The single currency is expected to remain on a nervous footing through the May 23-26 European parliamentary election.
The dollar was 0.15% firmer at 110.195 yen, in touching distance of a two-week high of 110.320 scaled the previous day.
Aussie Dollar Slips After RBA Minutes; U.S. Dollar Near Flat.
On Tuesday, the Australian dollar slipped against its U.S. counterpart in Asia.
By 11:30 PM ET (03:30 GMT), the AUD/USD pair was down 0.3% to 0.6888. The pair rose over 1% against the greenback after Scott Morrison’s Conservatives surprisingly won parliamentary elections.
Analysts said the victory could inject greater certainty into the financial markets. Overnight, Morrison signalled he would cut taxes to stimulate the economy.
Meanwhile, the Reserve Bank of Australia’s (RBA) hinted that it would consider a case for a rate cut in June.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” RBA governor Philip Lowe said in a speech to the Queensland branch of the Economic Society of Australia in Brisbane.
The minutes of the RBA’s May meeting showed members discussed the possibility of a rate cut after the latest data revealed the country’s unemployment started to increase.
“As in the previous meeting, members discussed the scenario where inflation did not move any higher and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate,” the minutes showed.
The safe-haven Japanese yen failed to benefit from the news. The USD/JPY pair was up 0.2% to 110.20.
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