Dollar on defensive as U.S. bonds surge on Fed rate cut prospects

June 4, 2019

By Shinichi Saoshiro

TOKYO (Reuters) – The dollar was on the defensive on Tuesday after taking a beating against peers such as the euro and yen, hurt by a sharp slide in U.S. Treasury yields as traders raised their bets for a near-term rate cut by the Federal Reserve.

The benchmark 10-year Treasury yield fell to its lowest level since September 2017 overnight, coming within reach of the 2% threshold after St. Louis Federal Reserve President James Bullard said a rate cut “may be warranted soon” given the rising risk to economic growth posed by global trade tensions as well as weak U.S. inflation.

Treasury yields had already been on a steep decline as investors have been piling into safe-haven government bonds in the face of escalating trade tensions between Washington and its trade partners.

The dollar traded little changed at 108.045 yen after brushing 107.885 overnight, its lowest since early January.

The euro nudged up 0.1% to $1.1250 after rallying roughly 0.7% overnight to $1.1262, its highest since May 13.

“The dollar is even falling against currencies such as the euro. Participants have found an incentive to finally cover euro shorts on the sharp fall in U.S. yields,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“The dollar has been a safe-haven during the current ‘risk off’ phase, but it’s strength is waning as the unexpected pace of the drop in U.S. yields has become too much to ignore.”

The dollar index against a basket of six major currencies was steady at 97.220 after shedding 0.6% the previous day.

The Australian dollar was a shade lower at $0.6971 after climbing to a three-week peak of $0.6983 the previous day in the wake of the broadly weaker greenback.

Immediate focus was on the Reserve Bank of Australia’s (RBA) policy decision at 0430 GMT, when it is widely expected to cut its cash rate to an all-time low of 1.25%.

With a policy easing largely priced in, traders are keenly waiting on the RBA’s statement for any hint of further rate cuts.

Financial markets are fully pricing in a second cut by the RBA in September and see a 50-50 chance for a third move by Christmas.

The pound was flat at $1.2665, having crawled off a five-month trough of $1.2560 set on Friday thanks to the dollar’s underperformance.

Sterling had sunk to the five-month low, weighed by the prospect of Britain choosing a eurosceptic prime minister who could take a hard line on Brexit.

(Editing by Shri Navaratnam)

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