Dollar holds on to gains as investors rein in pricing for big rate cuts

TOKYO:  The dollar neared a three-week high against a basket of major currencies yesterday as investors continued to unwind bets on deep US interest rate cuts, pushing Treasury yields higher.

Further gains in the greenback depend on the tone Federal Reserve Chairman Jerome Powell strikes during two days of Congressional testimony started later yesterday.

Expectations for a 50 basis point (bps) rate cut at a Fed meeting later this month have evaporated, but investors still expect a 25 bps cut due to weak inflation and worries about growing business fallout from the US-China trade war.

The dollar could continue to creep higher if Powell’s comments on the US economy are perceived as neutral or even slightly hawkish, which would support the argument that additional rate cuts will be limited.

Renewed strength in the dollar would be an extra worry for the British pound, which is stuck near a six-month low due to uncertainty over how Britain will avoid a messy no-deal exit from the European Union.

“The Fed is headed for a rate cut, but expectations surrounding the speed and scale of cuts had gotten out of hand,” said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo.

“Now we’re scaling things back. US economic data is not as bad as Europe or other countries. This will support the dollar.” In Asian trading, the index that tracks the greenback against six other major currencies was at 97.516 after touching 97.588 on Tuesday, which was the highest since June 19.

The dollar edged up to 108.990 yen in Asia, which was its strongest level since May 31.

The benchmark 10-year Treasury yield was at 2.0752 percent, up from a 2-1/2-year low of 1.9390 percent reached on July 3.

Source from: The Peninsula