Dollar drops as rate cut bets mount, weak inflation halts euro's rally

[June 04, 2019]  By Tommy Wilkes

LONDON (Reuters) - The U.S. dollar weakened to its lowest since mid-April on Tuesday as investors bet the Federal Reserve could soon cut interest rates, while concerns about global growth encouraged investors to buy the safe-haven yen.

The euro rose on the back of dollar weakness but lower-than-expected euro zone inflation in May brought the single currency's rally to a halt.

The benchmark 10-year U.S. Treasury yield fell to its lowest since September 2017 overnight after St. Louis Federal Reserve President James Bullard said a rate cut "may be warranted soon" given weak U.S. inflation and the threat global trade tensions pose to economic growth.

The Japanese yen has been the main beneficiary from a shift toward assets investors deem safer. It rose as much as 0.2% to 107.84 yen per dollar, its strongest since Jan. 10.

The dollar index, which measures the greenback against a basket of currencies, slipped to 96.995, its weakest since April 18, before recovering as the euro reversed its gains.

"As long as it (the dollar) is at the center of the trade conflict, U.S. yields fall due to concerns about real economic effects and the market is literally calling out for rate cuts, there are no positive arguments supporting the dollar," Commerzbank analyst Antje Praefcke said.

Other strategists are less bearish on the dollar, arguing that rate cuts have already been priced in and noting that if global growth does worsen, the dollar should benefit from its safe-haven credentials.

The euro pulled back from six-week highs after weaker than expected flash consumer price inflation for the month of May but was still 0.1% firmer at $1.1247 by 1030 GMT.

The European Central Bank meets on Thursday, where investors will look to see how concerned policymakers are about signs of a downturn in growth.

Some analysts remain cautious on the euro, seeing its fortunes largely tied to the outlook for rate cuts by the Fed, which has more space for monetary easing than the ECB does.

"We still see the policy background in the euro zone leaving the euro as the anti-dollar," said Adam Cole, currency strategist at RBC Capital Markets, predicting euro/dollar could fall to $1.10 before finishing the year at $1.14 - still firmly within its current trading range.

The Australian dollar was little changed, at $0.6977, after the Reserve Bank of Australia cut interest rates to a record low of 1.25%, as expected.

The pound rose 0.1% to $1.2673, up from a five-month low of $1.2560 set on Friday. However, it slid to a 20-week low against the euro.

Sterling has fallen on the prospect of a euroskeptic prime minister replacing Theresa May who could push for a more decisive break from the European Union, Britain's largest trading partner.

(Editing by Larry King and Ed Osmond)

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