Dollar weakens as traders pare Fed rate-hike bets: Markets Wrap

The dollar fell against most of its major peers after weak US economic data reduced bets on a Federal Reserve interest-rate hike next month.

A Bloomberg gauge of the dollar slipped 0.1 per cent, heading for a third day of losses and hovering near levels last seen in May. MSCI’s emerging-market currency index rose to an intraday record, with the Taiwan dollar and Thai baht among the region’s biggest gainers. Meanwhile, the Bloomberg Asia Dollar Index climbed to the strongest level since May.

Pressure on the dollar increased after US government data on Friday showed retail sales fell in July by the most in more than a year as consumers pulled back on purchases. Swaps traders see less than a 30 per cent chance the Fed will raise rates next month. That’s down from about 50 per cent odds only a week ago. 

Treasuries rose across the curve, with the yield on the rate-sensitive two-year note falling two basis points to 4.15 per cent. Yields on the 10-year and the 30-year bonds both declined by one basis point.

Elsewhere, Brent gained 0.5 per cent to about $89 a barrel as renewed Israeli attacks on Lebanon and the prospect of fresh US sanctions on Iran added to geopolitical uncertainty. MSCI’s Asia Pacific equities gauge rose 0.1 per cent, while equity-index futures for Wall Street and Europe both edged higher.

Successive soft US inflation prints and the weak retail sales report have prompted traders to pare back expectations the US central bank will boost borrowing costs by year-end — a narrative that had been buoying the dollar.

President Donald Trump’s regular conversations with Fed Chair Kevin Warsh and renewed attempts to fire Governor Lisa Cook are also factors that weigh on the greenback, according to Richard Franulovich, head of foreign-exchange strategy at Westpac Banking Corp. in Sydney.

“Regular Trump-Warsh dialogue, renewed attempts to remove Cook, and a murky Fed reaction function keep questions about the US dollar’s safe-haven hedge properties alive,” he said. “Revamped de-dollarization is another upside catalyst, reinforced last week by multi-year high yields for US 10 and 30-year auctions.”

The US Treasury will sell 20-year bonds this week in a test of investor appetite for long-term debt following a few record-breaking auctions. 

Last week, the US government sold 30-year debt at the highest interest rate in a quarter century, a testament to investors’ demand for greater compensation to finance the nation’s growing deficit.

Monday’s cautious trading came as investors watched for efforts to reopen the Strait of Hormuz, which may weigh on oil after the commodity jumped almost 6 per cent last week. With stocks near record highs due to a revival in the artificial intelligence trade, attention remained on the Middle East for the next market catalyst.

“The most significant headwind for the market currently remains geopolitical uncertainty, which continues to weigh on market sentiment here and there, although the relative lack of military activity in the Middle East has lowered volatility at the margins,” said Kyle Rodda, a senior analyst at Capital.com.

In other corners of the market, futures contracts for the Nasdaq 100 Index inched up 0.2 per cent. Gold advanced 0.4 per cent to about $4,390 an ounce.

The yen edged higher against the dollar after a report showed Japan’s economic growth unexpectedly slowed in the three months through June as capital spending continued to slump.

A slew of Chinese data, including retail sales and industrial production, will be published Monday. Economists expect consumer spending to have picked up slightly in July, while factory output may have slowed, according to Bloomberg surveys. 

China’s “macro momentum continues to deteriorate” as credit growth has slowed and inflation remains weak, Wee Khoon Chong, a strategist at BNY, wrote in a note to clients. “July activity data are likely to reinforce the slowdown, with retail sales and high-tech investment the key areas to watch for resilience.” 

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