Dol­lar weak as US Trea­sury yield curve in­ver­sion sparks re­ces­sion fears

The Financial Daily - - NATIONAL -

NEW YORK: The dol­lar edged lower on Tues­day as U.S. Trea­sury yields fell, feed­ing fears that the Fed­eral Re­serve could pause in its rate- hike cy­cle, while an in­ver­sion in part of the yield curve was taken as a red flag for a po­ten­tial re­ces­sion.

Lin­ger­ing un­cer­tainty re­gard­ing China and the United States' abil­ity to re­solve their trade war pro­vided some sup­port to the green­back. Still, in­vestors were ner­vous about an in­ver­sion of the curve be­tween three-year and five- year U. S. Trea­sury notes and be­tween two- year and five-year notes.

Th­ese were the first parts of the Trea­sury yield curve to in­vert since the fi­nan­cial cri­sis, ex­clud­ing dated debt.

An­a­lysts ex­pected the two-year, 10-year yield curve to fol­low suit. This is seen as a por­tent of a U.S. re­ces­sion.

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

"I think that's one of the main nar­ra­tives trig­ger­ing risk aver­sion," said Al­fonso Es­parza, se­nior cur­rency an­a­lyst at OANDA in Toronto.

The dol­lar was 0.77 per­cent lower against the Ja­panese yen, which tends to ben­e­fit dur­ing geopo­lit­i­cal or fi­nan­cial stress as Ja­pan is the world's big­gest cred­i­tor na­tion. The euro was


short- 0.11 per­cent lower.

The dol­lar stum­bled last week af­ter Fed­eral Re­serve Chair­man Jerome Pow­ell on Wed­nes­day said U. S. rates were near­ing neu­tral lev­els, which mar­kets in­ter­preted as sig­nal­ing a slow­down in rate hikes.

The yield curve in­ver­sion and com­ments from Fed speak­ers are caus­ing in­vestors to re­think the po­ten­tial of a re­ces­sion or if rate hikes are near­ing the top, said Minh Trang, se­nior FX trader at Sil­i­con Val­ley Bank in Santa Clara, Cal­i­for­nia.

"If that's the case, ob­vi­ously the dol­lar has had a nice run, I think we may be see­ing the top on the dol­lar," he said.

Against a bas­ket of six ma­jor cur­ren­cies the dol- lar was down 0.07 per­cent at 96.972.

Mean­while, trade-re­lated ten­sions kept weigh­ing on global fi­nan­cial mar­kets. U.S. Pres­i­dent Don­ald Trump on Tues­day held out the pos­si­bil­ity of an ex­ten­sion of the 90- day trade truce with China but warned he would re­vert to tar­iffs if the two sides could not re­solve their dif­fer­ences.

The Aus­tralian dol­lar, viewed as a barom­e­ter of Chi­nese growth, gave up early gains to trade 0.26 per­cent lower.

Sterling briefly swooned to a 17-month low on Tues­day, be­fore re­cov­er­ing ground to trade lit­tle- changed on the day, in a volatile ses­sion dom­i­nated by Brexit-re­lated head­lines.

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