Wednesday, August 21, 2019

Dollar nudged off three-week high, U.S. yields capped before Jackson Hole

© Reuters. U.S. dollar notes are seen in this picture illustration© Reuters. U.S. dollar notes are seen in this picture illustration

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar was under pressure on Wednesday, elbowed off a three-week peak after a bounce in U.S. yields stalled ahead of a global central bankers meeting, at which the Federal Reserve is expected to give clues on further rate cuts.

Officials from major central banks will gather at Jackson Hole, Wyoming, on Friday with markets focused on a scheduled speech by Fed Chair Jerome Powell.

His comments are of particular interest after last week's inversion of the U.S. yield curve - widely regarded as a recession signal - boosted expectations the Fed would lower interest rates at its September policy meeting. Faced with rising risks to the U.S. economy, the central bank in July cut rates for the first time since the financial crisis.

The dollar index (DXY) against a basket of six major currencies was nearly flat at 98.232 after shedding 0.2% overnight.

The index had climbed to 98.450 on Tuesday, its highest since Aug. 1, as U.S. yields bounced from multi-year lows at the week's start on signs global policymakers were ready to step up stimulus support to stave off a steep economic downturn.

U.S. yields, however, declined overnight on the prospect of more easing by the Fed.

Takuya Kanda, general manager at Gaitame.Com Research Institute, believes U.S. President Donald Trump's "strong desire for deep rate cuts" may raise hopes among some traders of strong easing signals at Jackson Hole. But he also warned that Powell may opt to give little away in his speech as the Fed prepares for the September policy review.

Investors will also be looking for clues on the Fed's plans in minutes of its July policy meeting due later on Wednesday.

The dollar bounced 0.2% to 106.460 yen reversing a part of the previous day's losses, while the euro was steady at $1.1094 (EUR=), having put on 0.2% overnight.

The single currency dipped briefly after Italy's Prime Minister Giuseppe Conte announced his resignation on Tuesday.

"Conte's resignation won't have a strong impact on the euro in the longer run as it is only a chapter in the ever-shifting Italian politics," said Kanda at Gaitame.Com Research.

In addition to the Fed, the euro also has to contend with the possibility of the European Central Bank easing policy in September.

The Bundesbank said on Monday that the German economy may have continued to shrink over the summer as industrial production declined. That would mean the euro zone's biggest economy is now in recession following the second quarter's decline reported last week. Recession is commonly defined as two consecutive quarters of negative growth.

"Germany in recession would generate a strong buzz, and there is no doubt that economic conditions in the zone would force the ECB to take its next policy steps," said Daisuke Karakama, chief market economist at Mizuho Bank.

Sterling traded at $1.2156 , holding a bulk of the gains made on Tuesday when it advanced 0.4%.

The pound rose after German Chancellor Angela Merkel said the European Union would think about practical solutions regarding the post-Brexit Irish border.

The Australian dollar was largely flat at $0.6779 after edging up 0.2% on Tuesday.

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