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US dollar nurses losses as Trump investigation, weak US data overshadow Fed


[TOKYO] The US dollar nursed losses on Thursday as weak US inflation data left investors wondering if the Federal Reserve would follow up its latest rate hike with another later this year.

Deepening political turmoil in Washington also weighed on the greenback, with the Washington Post reporting that US President Donald Trump is being investigated by special counsel Robert Mueller for possible obstruction of justice.

Also on Wednesday, a prominent Republican was among those shot by a gunman said to be angry with Mr Trump.

The US dollar index, which tracks the US currency against a basket of six rivals, was flat on the day at 96.932 but above its overnight low of 96.323 plumbed after downbeat economic figures.

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The Federal Reserve raised interest rates a quarter per centage point to a target range of one per cent to 1.25 per cent as expected overnight and gave its first clear outline on its plan to reduce its US$4.2 trillion bond portfolio.

But the moves were overshadowed by inflation and retail sales data earlier in the day that fell short of market expectations. The core rate of inflation increased at just 1.7 per cent on year, the fourth straight monthly deceleration and the slowest overall pace in two years.

The Fed said a recent softening in inflation was seen as transitory, but the latest tepid price readings made investors question its view that the US economy is continuing to improve.

Against its Japanese counterpart, the dollar shrugged off earlier losses and was flat at 109.55 yen, above Wednesday's eight-week low of 108.81 yen.

The euro edged down slightly to US$1.1214, below a seven-month peak of US$1.1296 scaled overnight.

US 10-year yields were last at 2.134 per cent, below their US close of 2.138 per cent on Thursday, when they fell as low as 2.103 per cent, their lowest since Nov 10.

The Fed also mapped out a very gradual approach to shrink its US$4.2 trillion holdings of Treasury and mortgage-backed assets that would allow it to begin as early as September. The process could start "relatively soon", Fed Chair Janet Yellen said.

"There is a lot to digest, and even some apparently conflicting signals, such as the fact that the Fed revised its own inflation outlook slightly down and yet kept its intention to raise rates again this year," said Mitsuo Imaizumi, Tokyo-based chief foreign-exchange strategist for Daiwa Securities.

The Fed said it expects US inflation to be at 1.7 per cent by the end of this year, down from the 1.9 per cent previously forecast.

"It remains to be seen if the Fed can really do both this year - raise rates again, and also begin reducing its balance sheet," he added.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalisation at its Sept 19-20 policy meeting. The rest of them said it would make such a move at its Dec 12-13 meeting.

They said they expected Fed policymakers to hike interest rates one more time by the end of 2017 and then three times in 2018.

The New Zealand dollar slipped 0.3 per cent to US$0.7243 after touching a low of US$0.7234, moving away from the previous session's four-month high of US$0.7319.

New Zealand's economy grew 0.5 per cent in the three months to March, lower than the 0.7 per cent growth forecast in a Reuters poll of economists and well below the central bank's forecast for 0.9 per cent growth.