Dollar Slips as U.S. Treasury Yields Fall

The dollar slid in Asia on Tuesday as U.S Treasury yields tumbled to three-month lows, a sign a few investors were betting the Federal Reserve would slow the pace of its rate hikes.

U.S. Dollar banknotes close-up photo.

The weakness in the dollar comes against the conditions of a short-term ceasefire in the US-China trade strife, which has supported investor confidence in riskier currencies versus the safe-haven greenback.

The U.S. 10-year Treasury yield tumbled to 2.49 percent on Tuesday, its lowest level since mid-September. The difference in yield between the U.S. 2-year and 10-year tightened to its smallest since July 2007.

The two-10-year yield curve is a key focus for investors as an inversion is seen as predictor of a U.S. recession.A yield curve is said to be upturned when yields on longer-dated development bonds are lower than shorter-dated development bonds.

The yield curve has beaten as ongoing interest rate hikes sent short-dated yields higher, while longer-dated Treasuries are bolstered by lukewarm inflation and raising worldwide development.

“Falling U.S. yields are a negative for the dollar, especially versus the major currencies,” said Rodrigo Catril, senior currency strategist at NAB.

Catril added that U.S. Treasury yields are close to pivotal technical support levels, a break of which might add more pressure on U.S. yields and the dollar. The dollar index, a scale of its value versus six major peers, was off 0.23 percent at 96.8. The dollar had been upheld for most of 2018 by a robust U.S. economy and a relatively hawkish Fed, which is broadly anticipated to raise its policy interest rate later this month.

Markets have priced in an 87 percent likelihood of a rate hike at the Fed’s December 18-19 meeting.

The dollar came under pressure last week when the market took comments from Fed Chair Jerome Powell as indicating a slower pace of rate hikes.

A more dovish tone from the Fed last week has led markets to question how many times the central bank will hike rates in 2019.

“Given data remains strong, we think the Fed will hike twice in 2019 and that’s more than what the market is pricing in right now…we remain moderately bullish on the dollar,” said Nick Twidale, chief operating officer at Rakuten Securities.

Currencies such as the Chinese yuan, which battered in the US-China trade war, expected to trade stronger versus the greenback in the coming weeks as investor sentiment develops.

The dollar dropped 0.5 percent against the offshore yuan to 6.8375. On Monday, it lost 1.07 percent, its sheer percentage plummet since August 25.

“For now, it seems China has got the best out of G20 and we expect the yuan to remain supported,” added Twidale.

Nonetheless, he cautioned that markets need to see a further easing in trade tensions for the risk-on rally to continue.

The Australian dollar increased 0.3 percent in Asian trade at $0.7376. The Reserve Bank of Australia kept its rule cash rate unchanged on Tuesday in a broadly expected move.

The yen traded at 113.13 to the dollar, with the greenback losing 0.4 percent versus the Japanese currency.

Elsewhere, sterling was increased 0.2 percent to trade at $1.2744 because of wide dollar weakness. On Monday, the pound drop below $1.27 for the first time since October 31.

Sterling has posted losses for three consecutive weeks as traders wager that British Prime Minister Theresa May will not be allowed to pass her Brexit deal through parliament on December 11.

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