FX Market: Dollar Weakens on Soft US Economic Data

FX Market – Lackluster US economic data weakened the US dollar as it strengthened speculations that the Federal Reserve will cut rates in the year. Meanwhile, the British pound stayed near nine-month highs as market participants hope for a vote in delaying Britain’s exit from the European Union.

US manufacturing output slipped 0.4 percent in February, recording its second consecutive month of weakening. Factory activity in New York State was also weaker than what has been expected this month, with the index recording 3.7.

Further, the 10-year Treasuries yield slumped as low as 2.580 percent, which is its lowest since January 4. Fed funds futures indicated that investors were betting on a 40 percent chance of a rate cut this year. That is a huge jump from zero percent recorded earlier this month.

“The 10-year yield closed below 2.6 percent, for the second time this year after closing below that level only on one day at the beginning of year,” said a chief strategist. “If it stays below that level sustainably, it will be the first time since January 2018, when yields started rising on expectations of accelerating growth and inflation following tax cuts. Yields are slipping back as US economic sentiment is cooling down.”

Meanwhile, most investors believe that the Fed will put rates on hold in the near future.  They also suspect that the Fed will unveil a plan to end its balance sheet runoff later this year.

“The focus is on how dovish the Fed will be. I got the impression that markets have gone a bit too far in expecting rate cuts. There’s a risk such views will be rolled back if the Fed’s dot plots show the board members still expect a rate hike this year,” said one market economist.

FX Market Figures

The US dollar index, which tracks the dollar against a basket of six other major currencies, inched down 0.1 percent to 96.481. This came the index lost 0.81 percent in the prior week, the largest loss since late August.

On the flip side, other currencies gained. The euro rose to $1.1336, flat in early Monday trade after having gained 0.86 percent, which was its biggest weekly gain since late September.

The Aussie dollar jumped 0.4 percent to two-week high of $0.7115.

Against the yen, the dollar fetched 111.50, little moved on the day but away from Friday’s nine-day high of 111.90.

The British pound hovered not far from its nine-month high of $1.3380, backed by the relief that a no-deal Brexit will likely be avoided. It was last trading at $1.3292.

British Prime Minister Theresa May’s ability to secure support for the Brexit deal she was proposing in the parliament still remains uncertain. The parliament has rejected her offer by a wide margin twice.

The British leader only has 3 days to secure approval for divorce deal to leave the European Union if she wants to go to a meeting with the bloc’s leaders on Thursday. May has previously warned hard-Brexiteers that if they didn’t approve her deal, the nation’s Brexit could face a long delay and could involve taking part in the bloc’s parliamentary elections.