Dollar on defensive amid uncertainty

▶ Fed more likely to slow interest rate hikes

The dollar trimmed some of its recent losses but remained under pressure on Wednesday, as an inversion in part of the Treasury yield curve raises concerns about a potential US slowdown.

The Australian dollar slumped more than half a percent against the greenback as disappointing economic data further dimmed the chance of a rise in rates. The Aussie moved sharply off a four-month top of $0.7394 hit early in the week.

Investors were nervous over an inversion of the yield curve between three-year and five-year US Treasury notes and between two-year and fiveyear notes.

These were the first parts of the Treasury yield curve to invert since the financial crisis.

“In the initial phase of the inversion of the yield curve markets are worried about whether there’ll be a recession,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“They react more aggressively to weak data than to strong data,” Yamamoto said. “I think the dollar can be in correction-mode in a yield-curve inversion environment.”

Against a basket of six key rivals on the US Dollar Index, the dollar edged up 0.1 percent to 97.092, trimming this week’s losses to 0.2 percent. It was 0.6 percent off a 17-month peak of 97.693 touched on Nov. 12.

Interest rate hikes have sent shortdated yields higher, even as slowing economic growth expectations have kept longer-dated yields down.

The dollar has been under pressure since Federal Reserve Chairman Jerome Powell said last Wednesday that US interest rates were nearing neutral levels, which markets interpreted as signaling a slowdown in the pace of rate hikes.

Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank, said there is proof that an inversion between three-month Treasury bills and 10-year Treasury notes precedes a recession.

The spread between three-month Treasury bills and 10-year Treasury notes was 50 basis points as of Tuesday, its smallest since October 2007.