Forex: Dollar on back foot after soft data fans bet on dovish Fed

Dollar notes

The dollar licked its wounds on Monday after soft U.S. data increased bets the Federal Reserve will cut rates later this year while the pound hovered near nine-months high on hopes for a delay in Britain’s exit from the European Union

The dollar’s index against a basket of six major currencies edged down 0.1 per cent to 96.481, after having shed 0.81 per cent last week, the biggest loss since late August.

Weaker-than-forecast U.S. economic data on Friday cemented expectations the Federal could strike a dovish stance this week, sending U.S. bond yields down to 10-week lows.

U.S. manufacturing output fell 0.4 per cent in February, weakening for a second straight month, while factory activity in New York State was softer than expected this month with an index reading of 3.7.

The 10-year Treasuries yield fell to as low as 2.580 per cent, its lowest since Jan. 4, while Federal funds futures priced in about 40 per cent chance of a rate cut this year, compared with almost zero percent seen earlier this month.

“The 10-year yield closed below 2.6 per cent, for the second time this year after closing below that level only on one day at the beginning of year,” said Chotarto Morita, chief strategist at SMBC Nikko Securities.

“If it stays below that level sustainably, it will be the first time since January 2018, when yields started rising on expectations of accelerating growth and inflation following tax cuts. Yields are slipping back as U.S. economic sentiment is cooling down,” he said.

Against this background, many investors expect the Fed to suggest rates will be on hold in the near future and to unveil a plan to end its balance sheet runoff later this year in its meeting ending on Wednesday.

“The focus is on how dovish the Fed will be. I got the impression that markets have gone a bit too far in expecting rate cuts.

“There’s a risk such views will be rolled back if the Fed’s dot plots show the board members still expect a rate hike this year,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

As the dollar loses steam, other major currencies rose by default.

The euro inched up to 1.1336 dollar, flat in early Monday trade having gained 0.86 per cent, the biggest weekly gain since late September.

The Australian dollar reacted more, gaining 0.4 per cent to a two-week high of 0.7115 dollar.

The dollar fetched 111.50 yen, little changed on the day but off Friday’s nine-day high of 111.90.

The British pound stood not far from last week’s nine-month high of 1.3380 dollar, supported by relief that a no-deal Brexit will likely be averted. It last stood at 1.3292 dollar.

It is not clear if British Prime Minister Theresa May can secure support for her Brexit deal in the parliament, which has twice rejected her offer by a wide margin.

May has only three days to win approval for her deal to leave the European Union if she wants to go to a summit with the bloc’s leaders on Thursday.

May is warning hard-line Brexiteers that unless they approved her Brexit divorce deal, Britain’s exit from the European Union could face a long delay and could involve taking part in the bloc’s parliamentary elections. (Reuters/NAN)