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U.S. Dollar Flat in Holiday-Thin Trade
The greenback was flat on Wednesday in holiday-thinned trade as another round of upbeat earnings continued to push investors towards equities and other riskier assets.
The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was flat at 96.662 as of 10:23 AM ET (14:23 GMT).
Trading is expected to be thin for the rest of the week, as U.S. markets close on Friday for the Easter holiday.
Earlier data in China had helped lift the dollar, as gross domestic product grew 6.4% in the first quarter from a year earlier, suggesting the economy is not slowing down like initially feared.
The Chinese yuan rose, with USD/CNY down 0.3% to $6.6884.
The dollar was mostly flat against the safe-haven yen, with USD/JPY slipping 0.01% to 111.97.
Sterling inched down as the U.K. parliament is on recess and no progress on Brexit can be made before next week. GBP/USD fell 0.05% to 1.3039.
Elsewhere, USD/CAD fell 0.2% to 1.3329 after a surprise jump in core inflation suggested the economy could be tighter than the Bank of Canada thought.
In Europe, EUR/USD gained 0.2% to 1.1294 after European Central Bank governing council member Ewald Nowotny said the bank is unlikely to cut its June forecast as it waits for the euro zone economy to stabilize in the second half of the year.
Dollar near 1-Month Highs, Sterling Sinks
The U.S. dollar was hovering near one-month highs against a currency basket on Wednesday, supported by higher U.S. Treasury yields after the U.S. temporarily eased restrictions on Chinese telecommunications giant Huawei.
The move came as a reprieve for markets which had been roiled by fears over the escalating trade war between Washington and Beijing but investor sentiment remained subdued as investors monitored the increasing involvement of tech companies in the trade spat.
"The trade dispute won't be resolved easily, so the risk-off mood won't come off all of a sudden. I think market sentiment will rather improve one small step at a time," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.
At 03:30 AM ET (0730 GMT), the dollar index, which measures the greenback against a basket of six major currencies, was at 97.942, just below Tuesday’s peaks of 97.953, the highest level since April 26. The index is up 2% year to date.
The dollar edged lower against the yen, with USD/JPY dipping 0.1% to 110.38, off the two week high of 110.67 reached in the previous session.
Data overnight showed that Japanese exports fell for the fifth straight month in April, highlighting the threat to the world’s third largest economy from the U.S.-China trade war.
Sumitomo Mitsui's Sera said the yen's weakness overnight was thanks to the higher U.S. Treasury yields, which ticked up in response to the recovery in U.S. equities.
"When yields are rising, it's natural for the dollar to be bought. I think moves in U.S. yields are really important," she said.
The 10-year U.S. Treasury note yield was last at 2.421%, almost unchanged for the day.
The euro was little changed, with EUR/USD at 1.1153 as investors remained wary ahead of European Union elections due to start on Thursday.
Eurosceptic parties are widely expected make a strong showing, which could hamper approval of the next European Commission president and budget.
The British pound sank to its lowest levels since January, with GBP/USD down 0.3% to 1.2666 after Prime Minister Theresa May’s final attempt to win over support for her EU withdrawal deal fell flat, throwing the country into renewed turmoil over Brexit.
Dollar set for biggest rise in three weeks as Fed eyed
The dollar rose on Friday and was set for its biggest weekly gain in three weeks as investors squared up for a U.S. central bank meeting next week where policymakers might signal when it plans to cut interest rates for the first time in a decade.
But with bets on U.S. interest rates swinging massively - market expectations are now for three rate cuts until end-2019, versus three hikes foreseen just six months ago - investors are growing cautious that policymaker rhetoric might underwhelm.
"There is a risk that the Fed might not be as dovish as what markets expect next week," said Fritz Louw, a currency strategist at MUFG Bank based in London.
Markets are pricing in about a 33% probability of a quarter point rate cut next week and as many as 73 basis points in cumulative rate cuts through the end of the year.
Against a basket of its rivals, the dollar rose 0.1% to a one-week high of 97.09.
Elsewhere, the Australian and New Zealand dollars fell as bets on interest rate cuts undermined demand as a Group of 20 meeting later this month kept investors sidelined.
The Aussie fell 0.24% to $0.6892 and was down 1.5% for the week, the biggest decline since mid-May. The Kiwi dollar dropped 0.4% to $0.6529, down 2% for the week.
Bond futures imply a 66% probability the Reserve Bank of Australia will follow up its recent quarter-point easing with another in July. If not, a reduction to 1% is considered certain by August.
Markets were also raising bets of a rate cut by the Reserve Bank of New Zealand.
The weakness in the Australian dollar has pushed investors to unwind some of their carry trades, where speculators borrow in a low-yielding currency such as the Swiss franc and invest in relatively higher-yielding ones such as the Australian dollars.
The Australian dollar/Swiss franc cross, a barometer for such speculative bets, has fallen nearly 6% in eight weeks, indicating hedge funds were losing money on such bets.
Dollar slips after biggest weekly drop in 4 months on dovish Fed
The dollar fell against its rivals on Monday after sustaining its biggest weekly drop in four months last week as the U.S. central bank opened the doors for a likely rate cut as early as next month.
The greenback has been on the receiving end of a broad market selloff in major currencies as global central banks led by the U.S. Federal Reserve signalled a dovish outlook on monetary policy due to growing signs of a weak global economy.
On Monday, the dollar slipped 0.2% against a basket of its rivals at 96.028. It fell 1.4% against other currencies last week, its biggest weekly drop since mid-February.
"If the Fed embarks on a rate-cutting cycle, the dollar will weaken more because of the cushion room that the United States has relative to other economies where central banks are a bit more constrained to ease policy," said Constantin Bolz of wealth manager Portfolio Concepts.
Bond markets expect the Fed to cut interest rates by 75 basis points through the end of the year, which would compress the gap between yields of ten-year U.S. bonds and comparable German government debt, currently at 234 basis points.
Investors also focused their attention on whether Washington and Beijing could resolve their trade war at a summit in Japan later this week.
Markets believe that if the United States and China fail to call a truce, then the Fed will be forced to cut interest rates to prevent a wider economic slowdown resulting from higher U.S. tariffs on imports.
Latest weekly positioning data confirmed that view.
While hedge funds have turned mildly bearish on the outlook for the dollar in the latest weekly positioning data, they have ramped up bearish bets against currencies such as the Australian dollar on fears of rising challenges for the global economy.
Both China and the United States should make compromises in trade talks, Chinese Vice Commerce Minister Wang Shouwen said on Monday.
Elsewhere, the euro stretched its rally last week, when it added 1.4%, rising about 0.15% to $1.1386, its highest since March 22. It last traded at $1.1381.
The pound was broadly steady as the leadership contest for the ruling conservative Party entered its final stretch with Jeremy Hunt facing rival Boris Johnson to replace outgoing Prime Minister Theresa May.
Against the dollar, the pound was broadly steady at $1.2751 while it was a shade weaker against the euro at 89.31 pence.
Dollar Struggles as Fed Rate Cuts Bets Weigh
The dollar was trading near one-week lows against the yen on Thursday as declines in U.S. Treasury yields boosted expectations the U.S. Federal Reserve will cut interest rates later this month.
Government bonds are in the middle of a global rally, which has pushed U.S. Treasury yields to the lowest in over two-and-a-half years and sent European yields to record lows on increasing bets major central banks will cut interest rates to bolster the global economy.
Waning expectations for a quick resolution to the U.S.-China trade war also hurt sentiment on the dollar.
Investors were shifting their attention to the U.S. non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with 75,000 in May.
Positive payroll data is unlikely to buoy the dollar as expectations for U.S. rate cuts are strong, given low inflation and the fallout from the trade war.
"When U.S. yields are this low, you can't expect people to pile in and buy the dollar," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.
"Sentiment is tilted toward testing the dollar's downside. There are expectations for lower rates in Europe and Britain, so it may be easier for the dollar to move versus the yen."
The dollar was little changed at 107.79 yen on Thursday, after touching a one-week low of 107.54 yen on Wednesday.
The greenback has fallen 3.5% versus the yen in the past three months amid growing signs the Fed will cut rates at its July 30-31 meeting.
The U.S. dollar index against a basket of six major currencies was little changed at 96.35.
Global forex trading likely will be subdued on Thursday as U.S. financial markets are closed for a public holiday.
U.S. President Donald Trump's administration said on Wednesday it is scheduling a call with Chinese negotiators next week that would mark the resumption of talks between the two countries.
Expectations for a smooth resolution to a dispute have waned after Trump said any agreement would have to be tilted somewhat in favor of the United States.
The euro was trading near a two-week low at 1.1282.
The common currency has weakened since IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.
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