US Dollar Struggles on Interest Rate Speculation

The dollar floundered to recover in Asian trade on Friday, dragged by fresh speculation that the widely expected rate hike this month could turn out to the last one before the Federal Reserve reaches the pause button on its tightening cycle.

Investors have been taken aback by the recent steep falls in US Treasury yields, with an inversion of the yield curve signaling a sharp economic slowdown or even a recession near the horizon.

Their immediate focus was on November US non-farm payrolls, unemployment, and wage due to be published later on Friday for clues to how the world’s top economy is faring.

“Arguably, one of the strongest parts of the US economy has been the labor market,” said Chris Weston, who is a Melbourne-based head of research at foreign exchange brokerage Pepperstone. “If we see any cracks appearing in there, the US dollar will start to fade off.”

Dollar investors were given more reason to be cautious after the a news that reported Fed officials are considering whether to strike a wait-and-see attitude after a likely rate increase at their meeting in December.

The dollar index, which tracks the greenback against a basket of six other major currencies, was practically flat at 96.802. The index dropped 0.3 percent in the previous session, closing at one-week low and down 0.9 percent from a 17-month peak hit on November 12.

The benchmark US 10-year Treasury yield was last at 2.896 percent after slipping overnight to its lowest level since August.

The dollar has fallen after Fed Chairman Jerome Powell said last week that US interest rates were nearing neutral levels, which markets considered as indications of a slowdown in interest rate hikes.

If the Fed raises interest rates as expected at its December 18 to 19 meeting, it would be the fourth hike this year, and investors are focused on how much further the tightening cycle has to run.

“The guidance going forward will be key to yields and equity market moves, which right now forex exchange markets seems to be reacting to,” said Bart Wakabayashi, who is Tokyo branch manager at State Street Bank.

Interest rate futures tell that traders see no more than one rate increase from the Fed in 2019, when compared to the previous expectations for possibly two rate hikes, according to CME Group’s FedWatch program.

On Friday, the dollar was steady against the euro at $1.1378. It tacked on 0.1 percent to 112.79 yen. The common currency had gained 0.3 percent against the dollar during the previous session while the yen rose nearly a quarter of a percent.

The Canadian dollar was at C$1.3388, practically unchanged from Thursday’s close. It had reached a one and a half-year low of C$1.3445 against the greenback overnight after the Bank of Canada suggested that the pace of future rate hikes could be more gradual.

Meanwhile, the Australian dollar was flat at $0.7236, not far off the three-week trough of $0.7192 reached on Thursday.

The greenback has been pressured this week by an inversion in part of the US yield curve seen as an early warning sign for a potential recession.