The dollar hovered near a two-week low against its peers on Tuesday as cautious comments by Federal Reserve officials over the global outlook and weak data at home raised questions over whether the U.S. central bank will slow down its rate increases.
Overnight, New York Fed President John Williams told a Q&A event that “We will be likely raising interest rates somewhat, but it is really in the context of a very strong economy.”
Williams noted that the Fed is not on a pre-set course and will adjust monetary policy to keep the economy strong with low inflation.
Last week, Fed Vice Chair Richard Clarida and Dallas Fed President Robert Kaplan raised concerns over a potential global slowdown that has seen markets betting heavily that the rate-hike cycle is on its last legs, even as the senior Fed officials signalled more interest rate increases.
The Fed executives’ remarks led some traders to question whether the dollar’s rally was nearing its end, with the benchmark U.S. 10 year treasury yields pulling back slightly.
The dollar index, a gauge of its value versus six major peers, traded marginally lower at 96.17 on Tuesday. The index fell nearly half a percent last week, its biggest weekly drop since late September.
However, some analysts believe the dollar can stage a comeback.
“William’s comments are justified but are not as dovish as the comments made by Clarida and Kaplan last week. The market may rethink whether it read Friday’s comments as overly dovish which may lead to a reversal in dollar weakness,” said Ray Attrill, head of currency strategy at NAB.
Attrill added that safe-haven buying can return to the dollar if global equities keep correcting and their volatility continues to rise.
“If we see the VIX (volatility index) at 25, I would expect the dollar to pick up steam.” The index is currently at 20.10.
Economists still expect the Fed will raise interest rates again next month and three times next year, but a strong majority say the risk is it will slow that pace down.
The greenback was also weighed by surprisingly weak housing data, which pushed down U.S. 10 year bond yields.
U.S. homebuilders’ sentiment recorded its steepest one-month drop in over 4-1/2 years, suggesting that rising borrowing costs are squeezing the real estate sector.
Goldman Sachs strategists said in an outlook for 2019 that the greenback may decline as much as 6 percent against major peers with the U.S. economy slowing as the boost from tax cuts and easy credit fades through the year.
The Japanese yen traded flat to quote at 112.55. It had hit 112.38 earlier in the trading session, its highest level in November. But analysts think that further strength in the yen is unlikely.”We are not seeing Japanese investors retreat from the U.S. and foreign markets…flow numbers show that Japan remains close to fully invested abroad,” said Attrill. “This gives support to dollar/yen.”
The yen has strengthened over the last two sessions as traders rushed to the currency in the uncertainty around U.S.-China trade talks, Brexit worries, and the Italian budget standoff.
Nonetheless, the euro was well bid in early Asian trade at $1.1456. The single currency has gained two percent versus the dollar over the last five trading sessions despite the ongoing standoff between the European Union and Italy over its free-spending budget, which breaks EU fiscal norms.
Analysts have been concerned about an economic slowdown in the euro area and will be keeping a close eye on the French and German manufacturing performance data later this week.
“Recent evidence suggests that the Eurozone economy is slowing and there’s a very good chance the PMIs will confirm that. However, the single currency could easily hit 1.1500 before the data is released,” said Kathy Lien, managing director of currency strategy at BK Asset Management in a note.
Meanwhile, sterling gained 0.1 percent to trade at $1.2860.
The Australian dollar traded marginally lower at $0.7289. Minutes of the Reserve Bank of Australia’s (RBA) November policy meeting on Tuesday showed policy makers expect above-trend growth this year and next, helped by interest rates at a record low 1.50 percent.