Dollar Slumps on New Powell Comments

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US dollar closeup shot

The dollar weakened against other currencies on Monday, as traders felt more bearish due to the increasing expectations that the Federal Reserve would put its policy tightening to a pause in 2019.

Risk appetites were strong in Asian trade, thanks to China’s aggressive monetary easing on Friday to address the steep economic slowdown and to hopes that Washington and Beijing can strike a comprehensive trade deal.

The euro gained 0.22 percent versus the dollar while the Australian dollar,  usually treated as the measure of global risk appetite, gained 0.2 percent and touched its peak level since December 20.

Against the yen, the greenback slipped 0.41 percent, fetching 108.09.

“The newsflow we have seen since Friday has lifted sentiment,” said Michael McCarthy, who is the chief market strategist at CMC Markets in Sydney. “The market certainly liked what (Fed Chair Jerome) Powell said on Friday and the reaction has been negative for the dollar.”

McCarthy also stated that China’s cuts in bank reserve requirements “are very important and have lifted commodities…this should be supportive for the Australian dollar.”

On Friday, Powell told the American Economic Association that the Fed is not on a preset path of interest rate hikes and that it will be sensitive to the downside risks that the markets are pricing in.

In spite of Friday’s stronger than expected US December jobs data, many analysts believe the world’s biggest economy is losing momentum and further rate hikes are the last thing it actually needs. Powell stated that the American central bank is ready to “shift the stance of policy” bolstered investor sentiment and sent US stocks soaring on Friday.

The dollar outperformed other currencies in 2018 because of the Fed being the only major central bank to increase rates. If the Fed hold rates in 2019, analysts see slim chances of further greenback appreciation.

US 2-year and 10-year Treasury yields slipped steeply over the last couple of weeks indicating that bond traders see little chance that the Fed raising rates this year on the increased possibility of a growth slowdown in the world’s largest economy.

On the other hand, few analysts still see some chance that the Fed would raise rates in 2019.

“Last Friday’s strong US jobs data suggested that recession fears were overblown,” said Phillip Wee, who is a currency strategist at DBS in a note. “With the Fed only looking to pause rate hikes, the markets is likely to have gotten ahead of itself in pushing at the US 2-year and 10-year bond yields below the Fed Funds Rate last week.”

The dollar index, which is a gauge of the dollar’s strength against a basket of six other currencies, was at 95.96, down 0.2 percent from the intraday high of 96.16.

After a string of weaker-than-expected manufacturing data, Chinese authorities on Friday slashed reserve requirements for all banks by 100 basis points. The move frees up $116 billion for new lending as it tries to decrease the risk of a pronounced fall in the pace of economic growth.

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