Dollar Struggles on Fed Rate Speculation

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The dollar floundered for traction against other currencies on Tuesday, with investors increasingly convinced that the Federal Reserve will not raise interest rates this year amid risks of a sharper slowdown in global growth.

US dollar closeup shot

The dollar was marginally steadier against the yen, after slipping 0.2 percent earlier in the session as traders betted that the monetary tightening cycle in the world’s biggest economy has been paused for the year.

On Friday, Fed Chairman Jerome Powell said to the American Economic Association that the Fed is not on a preset path of rate hikes and it will be sensitive to the downside risks that the markets are pricing in.

Powell’s colleague Raphael Bostic, who is the Atlanta Fed President, added to the central bank’s dovish tone on Monday. Bostic, who is not a voting member of the Federal Open Market Committee this year, said that the Fed may only need to raise rates once in 2019.

“The Fed is listening to the market and has acknowledged flashing market signs,” said Sim Moh Siong, who is the currency strategist at Bank of Singapore. “US inflation has been well behaved so far and so the Fed does have room to pause on its rate hike cycle.”

The dollar index, which tracks the dollar’s strength against a basket of six other currencies, was a bit higher, gaining 95.80. Earlier in the session, it had reached an intra-day low of 95.68.

The index has slipped around 2 percent since mid-December, and has followed a decline in US bond yields as market participants have grown increasingly confident that the Fed will not hike rates in 2019.

The dollar had fetched 4.3 percent in 2018 as the Fed hiked rates four times on the back of a strong domestic economy, falling unemployment and rising wage pressures.

However, market expectations for further Fed tightening this year have shifted markedly in the last few months, with some traders now expecting even a rate cut this year.

Financial markets have been rattled by heightened worries about slowing global growth, especially in the United States and China, though data on Friday showed strong US job growth.

Expectations of zero further rate hikes this year are likely to keep the greenback under pressure.

The euro was lower 0.2 percent at $1.1448, after reaching an intra-day high of $1.1485. The single currency has gained ground 1.3 percent over the last three trading sessions as the outlook towards the dollar softened.

The euro’s recent strength has surprised some analysts as growth and inflation remain weak within the Eurozone, well below European Central Bank forecasts.

“Having consolidated in a 200-pip range for a large part of the past 2 months, the pair is prime for a breakout,” said Kathy Lien, who is the managing director of currency strategy at BKX Asset Management in a note.

The British pound changed hands at $1.2787, relatively unchanged from its previous close. Traders expect sterling to remain volatile over the next few weeks due to Brexit woes.

Britain’s Prime Minister Theresa May must win a vote in parliament to get her Brexit deal approved or risk seeing Britain’s exit from the EU bloc descend into chaos. The vote is now due to take place the week beginning January 14.

May’s chances of winning the vote appear slim as the DUP, the small Northern Irish party that usually props up her government, is opposed to the deal.

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