The dollar was supported by rising U.S. yields and the blowtorch was on low-yielding currencies on Tuesday such as China’s yuan and Japan’s yen, which was pinned to its lowest since 1986.
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The dollar slipped on Tuesday in choppy trading after Federal Chair Jerome Powell struck a slightly dovish tone in his comments, suggesting that the U.S. central bank is more than likely to start its easing cycle later this year.
Powell, in a monetary policy conference in Portugal, said the U.S. economy has made significant progress on inflation as it gets back on the disinflationary path. His remarks were viewed as dovish, analysts said.
“Fed chair Jerome Powell let his dovish plumage show. In our view, he put a September rate cut firmly on the table by acknowledging ‘significant progress’ in bringing inflation down, and pointing to the ‘two-sided risks’ facing policymakers as labor markets begin to cool,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“This is triggering an unwind in the surge in short-end yields that took place after last week’s presidential debate, and is forcing an altitude adjustment in the dollar.”
Powell’s comments offset data showing U.S. job openings increased in May after posting outsized declines in the prior two months. Job openings, a measure of labor demand, rose 221,000 to 8.140 million on the last day of May, according to the Job Openings and Labor Turnover Survey or JOLTS report.
Economists polled by Reuters had forecast 7.910 million job openings in May. Unfilled positions peaked at a record 12.182 million in March 2022.
Following the JOLTS report and Powell’s comments, U.S. rate futures have priced in a 69% percent chance of a rate cut in September, up from about 63% on Monday, according to LSEG calculations. The market has also priced in between one to two rates cut in 2024.
In late afternoon trading, the dollar index, which measures the U.S. unit against six other currencies, was down around 0.2% at 105.74.
The dollar has been recently supported overall by the persistent rise in Treasury yields.
Benchmark 10-year Treasury yields rose nearly 14 basis points to 4.479% overnight, with analysts linking the rise to expectations that Donald Trump will win the U.S. presidency, in turn leading to higher tariffs and government borrowing.
On Tuesday, the yield on the 10-year note was down 4.3 bps at 4.435%.
Against the yen, the greenback was slightly down at 161.43. It hit 161.745 per dollar on Tuesday, its strongest level in nearly 38 years, driven mainly by a wide gap in interest rates between the U.S. and Japan.
Japan’s finance minister said on Tuesday authorities were vigilant to sharp currency market moves, but stopped short of giving a clear intervention warning.
Against the euro, the yen touched a lifetime low of 173.67 on Monday and was just shy of that level on Tuesday, while against the Australian dollar, the yen was near its lowest in 33 years as carry trade remained attractive.
The euro was flat against the dollar at $1.0739, showing little reaction to comments on Tuesday from European Central Bank President Christine Lagarde, who was in the same monetary policy forum with Powell. She said the euro zone is “very advanced” on the disinflationary path but there remain “question marks” hanging over the outlook for economic growth.
Euro zone inflation eased last month but a crucial services component remained stubbornly high, fueling concern that domestic price pressures could stay at elevated levels.
Lagarde said on Monday the central bank needs more time to conclude that inflation is firmly on a path to 2% and benign economic developments indicate that rate cuts are not urgent.
The market is now looking to the second round of French elections during the weekend.
In other currencies, sterling rose 0.2% against the dollar to $1.2677 , but not far from the roughly two-month low it hit last week.
The Aussie dollar was down slightly at US$0.6657, with traders weighing central bank minutes, which showed much discussion about whether policy was tight enough to ensure inflation would slow as desired.
