Published: Wed, June 12, 2019
Markets | By Otis Pena

Dollar hovers near 11-week low on Fed rate cut bets

Dollar hovers near 11-week low on Fed rate cut bets

"We believe the Fed will cut rates this year but wait until December as they want to see evidence in the hard data that heightened trade tensions are significantly eroding economic activity before pulling the easing trigger", she said in an analysis.

What's less certain is when the Fed will act and how big any cut will be - a more traditional 25 basis point move or a bolder, 50 basis point reduction created to get a bigger bang for the buck. The core PCE price index has been running below the Fed's 2 per cent target this year.

"Further US dollar weakness especially against low yielding currencies including the euro, Swiss franc and yen would be likely if the dollar index breaks below the 96.500-level", says Lee Hardman, a currency analyst at MUFG.

However, the USA currency is just as vulnerable to a steep sell-off if this week's releases add to worries about the economic outlook.

The Fed can afford to be aggressive because inflationary pressures are muted.

The US consumer price index is forecast to have increased by 1.9% year-on-year in May, easing marginally from the prior 2.0%. In the 12 months through May, the CPI increased 1.8%, slowing from April's 1.9% gain.

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The feeble jobs numbers came on the heels of soft data on retail sales, factory output and home purchases and occur against a background of Trump's escalating trade war with China.

A note of caution is warranted, though, as the forthcoming data may not provide a clear enough direction for traders, and with the next Fed policy meeting a week away on June 18-19, some investors may choose to sit on the sidelines until then.

Last week, Powell helped fuel a rally in the stock market by holding out the possibility that the Fed will soon cut rates to protect the economic recovery from any damage resulting from Trump's trade wars. Analysts fear that it will send signals that the USA economy is not as strong.

Above: CME Group estimate of expectations for 2019 Fed Funds range.

Markets care about the inflation and Fed story because changes in interest rates, as well as the outlook for them, can have a significant influence over global capital flows as well as speculative short-term trading activity. This was much lower than the 180K that investors were expecting.

President Donald Trump slammed the Federal Reserve for high interest rates in a tweet on Tuesday, complaining the euro and other currencies were "devalued" against the dollar. The S&P 500 index ended up by 2.1 %. In April, he said the Fed should return to quantitative easing, a financial-crisis-era policy that injected trillions of dollars into the economy.

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