Defying rate-cut expectations, dollar gains for fourth month

[May 30, 2019]   By Saikat Chatterjee

LONDON (Reuters) - The dollar edged towards a one-week high on Thursday as trade tensions between China and the United States led investors to seek shelter.

U.S. money markets are pricing in roughly two interest rate cuts by January 2020 and the bond yield curve inverted further overnight, signaling rising recessionary risks for the world's biggest economy. But demand for dollars shows no sign of abating.

Expectations for U.S. interest rates have taken a U-turn since the end of 2018, when bond markets were betting on at least two more rate increases, before trade tensions hit global markets.

"The strength in the dollar is surprising given that markets are now expecting multiple rate cuts by 2020," Commerzbank FX strategist Ulrich Leuchtmann said.

Against a basket of other currencies, the dollar was stronger at 98.22, with gains more pronounced against such other currencies the euro and the pound. It was on track to rise for a fourth consecutive month.

Risk appetite was low despite some gains in European stocks, with bond yields sending recession warnings.

Some emerging-market currencies came under pressure. The Indian rupee and the Indonesian rupiah weakened. The Australian dollar recovered some of its overnight losses.

The spread between three-month U.S. Treasury bills and 10-year bond yields has inverted to its lowest level since August 2017. Financial markets consider an inverted yield curve a harbinger of recession.

The dollar was steady at 109.59 yen, about 0.5% above the 109.02 yen it touched on May 13, its lowest in more than three months.
 

Analysts said the yen, a safe haven backed by Japan's status as the world's biggest creditor nation, remained relatively weak because of domestic demand for dollars.

A Citibank report said long dollar positions remained significant in the currency market despite some recent unwinding.

"As there's persistent yen-selling and dollar-buying from Japanese investors when the rate approaches the 109.10 yen per dollar level, it's not easy for the yen to rise above the 109 level," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

(Reporting by Saikat Chatterjee; Additional reporting by Daniel Leussink in TOKYO; editing by Larry King)

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