US dollar stumbles as global sentiment weakens

[NEW YORK] The US dollar fell to two-week lows against the safe-haven yen and Swiss franc on Tuesday, as investors turned cautious amid political worries in Europe as well as weaker stock and commodity markets after a long US holiday weekend.

"There is a whiff of risk aversion about the markets," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto, after most global stock markets, including those in the United States, fell.

Commodities also weakened, with US crude oil futures trading below US$50 per barrel.

In the euro zone, falls in inflation in Spain and several German regions as well as European Central Bank chief Mario Draghi's commitment to continued emergency stimulus initially pushed the euro lower.

Signs that elections in Italy may come as early as September also added to the euro's early pressure.

But the euro recovered as the US dollar struggled. The US dollar has been soft the past two weeks on concerns over US President Donald Trump's administration.

"Without a doubt, the largest disappointment has come from fiscal policy," said Alessio de Longis, portfolio manager at Oppenheimer Funds in New York, citing an uncertain time frame for the passage of healthcare reform and difficulties facing the border-adjusted tax, which he said met strong resistance in Congress and from important industry lobbies.

"At this stage, we believe any meaningful progress on tax reform seems postponed to next year and, if it does come to bear, will likely be more modest in scope."

In late trading, the US dollar index was down 0.1 per cent at 97.30, with the euro up 0.2 per cent at US$1.1184.

Against the yen, the US dollar dropped 0.5 per cent to 110.77 yen, after earlier falling to a two-week trough of 110.67. The US dollar also slid to a two-week low versus the Swiss franc and was last down 0.4 per cent at 0.9745 franc.

Tuesday's US data, while mixed, still backed the expectation that the Federal Reserve will raise interest rates next month, analysts said.

Fed Governor Lael Brainard, a voter on the Federal Open Market Committee, said as much on Monday. She said another rate hike was likely soon, although soft inflation numbers could convince the Fed to delay further tightening. She also favours a gradual pace of rate hikes.

Data showed that April US consumer spending recorded its biggest increase in four months, while inflation rebounded. Consumer spending, accounting for more than two-thirds of US economic activity, increased 0.4 per cent last month. The so-called core personal consumption expenditure price index, the Fed's preferred inflation measure, also bounced back 0.2 per cent.

REUTERS