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Although some U.S. policymakers have spoken against negative
interest rates, two-year U.S. Treasury yields fell to a record
low of 0.105% last week and 2021 Fed fund futures contracts are
skirting negative territory.
Trump on Tuesday called for his country to "accept the gift" of
negative rates - as data showed that U.S. consumer prices
dropped 0.8% in April, the largest decline since December 2008
when the economy was in the throes of a recession, fuelling the
debate over the policy response.
"The central banker might use the opportunity to nip the
negative rates chatter in the bud," wrote CMC Markets analyst
David Madden, with many investors expecting a rebound in the
dollar should Powell decide to do so.
Against a basket of rivals, the dollar index was flat at 100.02,
hovering below the three-week high of 100.44 hit on Tuesday. The
greenback has gained more than 5% from an early March low of
94.63.
"If push comes to shove, the Fed would of course consider
negative interest rates, too, but they are likely to be on the
bottom of the Fed’s list of possible options when it comes to
supporting the financial system or the economy further," said
Commerzbank strategist Antje Praefcke.
The euro edged down 0.1% to $1.0840 against the dollar after
euro zone industrial production suffered its steepest monthly
fall on record in March as coronavirus containment measures hit
activity severely.
While the dollar has benefited from safe-haven flows amid the
market turmoil, the outlook remains divided, with hedge funds
holding their short bets on the currency while institutional
investors remain bullish.
Powell is due to speak on a webcast hosted by the Peterson
Institute for International Economics at 9 a.m. (1300 GMT).
Until now, Fed officials have said they do not see a need to cut
interest rates below zero and some market players expect Powell
to stick to that script.
"But what's worrying is that Trump is now talking about them.
Looking at past examples, the Fed has eventually done what Trump
wanted quite often," said Hiroyuki Ueno, senior strategist at
Sumitomo Mitsui Trust Asset Management.
Elsewhere, the British pound trimmed earlier gains to $1.2273 as
bond yields fell after data showed the economy contracted by a
record 5.8% in March even though household consumption dropped
less than feared by some market participants.
Sweden's krona was flat against the euro and fell 0.2% against
the dollar after inflation slid to its lowest pace in at least
30 years in April, below analyst forecasts.
The New Zealand dollar slumped 0.9% to $0.6018 against the U.S.
dollar after the central bank expanded asset purchase to NZ$60
billion from NZ$33 billion while its policy minutes said that
negative interest rates were a future option.
(Reporting by Saikat Chatterjee and Julien Ponthus; Additional
reporting by Hideyuki Sano in Tokyo; Editing by David Goodman
and Alison Williams)
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