Dollar dips to one-week low vs. yen on Fed rate cut view

By Gertrude Chavez-Dreyfuss
Updated
FILE PHOTO: A woman counts U.S. dollar bills at her home in Buenos Aires

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar slipped to a one-week low against the Japanese yen on Wednesday, weighed down by declining U.S. Treasury bond yields, fading optimism over the China-U.S. trade deal, and the possibility of fresh tariff hostilities with Europe.

Volume was light ahead of the U.S. Independence Day holiday on Thursday. Investors, though, are looking to Friday's U.S. nonfarm payrolls for June, with markets forecasting new jobs of 160,000.

U.S. economic reports on Wednesday were mixed and did not really change the dollar's trading direction.

Data from payrolls processor ADP showed U.S. companies added 102,000 private-sector jobs in June, much higher than the revised 41,000 jobs in May, but lower than the 140,000 analysts had forecast.

Paul Ashworth, chief U.S. economist at Capital Economics, said the ADP report suggests the deterioration in the broader economy has spread to the labor market.

"Even with the U.S.-China trade talks back on track, for now at least, the evidence of a slowdown in employment growth should still be enough to persuade the Federal Reserve to cut rates in either July or September, but expectations of a 50 basis-point cut seem misplaced," he added.

Wednesday's data also showed U.S. weekly jobless claims fell more than expected to a seasonally adjusted 221,000, while the U.S. trade deficit in May widened to $55.5 billion from April's revised $51.2 billion.

Numbers on the U.S. service sector were also downbeat, with the Institute for Supply Management's non-manufacturing index falling to 55.1 in June from 56.9 in May.

In afternoon trading, the dollar dipped 0.1% against the yen to 107.82, after earlier falling to a one-week low of 107.54 <JPY=>.

The dollar-yen pair has become more sensitive to trade developments, with investors having grown more skeptical about the possibility of a speedy resolution to the trade war.

Against a basket of six currencies, the dollar eased from Tuesday's two-week highs <.DXY> to trade little changed on Wednesday at 96.765. The index earlier fell as bond yields extended the previous day's decline, with 10-year yields hitting 2-1/2-year lows below 1.94% <US10YT=RR>.

(Graphic: FX market positions - https://tmsnrt.rs/2FPLRRN)

WEAK DOLLAR

Expectations have grown that the Fed will embark on its first rate cut in a decade at a policy meeting this month. Markets are assigning a more than a 70% probability of a quarter point rate cut at the next policy meeting.

"We continue to like the broad U.S. dollar lower," said Mark McCormick, global head of FX strategy at TD Securities in Toronto. "It's telling of the anti-U.S. dollar view that the last month has seen the yen rally alongside higher-yield emerging market currencies."

The euro, meanwhile, was little changed at $1.1283 <EUR=> following a volatile session on Tuesday.

The common currency briefly got a lift on Tuesday after a media report that the European Central Bank was in no rush to cut rates at the July meeting. But it later slipped after IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next ECB president.

(Graphic: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh)

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sujata Rao in London; Editing by Chizu Nomiyama and Jonathan Oatis)