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Dollar holds steady below a one-year high
THE dollar held steady below a one-year high on Tuesday as investors grew wary about the currency's outlook after a recent rally and concerns that US economic momentum could peak soon.
A key market focus on Tuesday is congressional testimony by Federal Reserve chairman Jerome Powell, with traders watching for clues on the pace of US interest rate rises as well as risks from trade conflicts.
Mr Powell will testify on the economy and monetary policy before the US Senate Banking Committee. He is expected to deliver an upbeat message on the outlook for growth and reaffirm the Fed's gradual monetary tightening policy, but he could face tough questions on the central bank's independence and how it would deal with an escalation in the global trade war.
"The escalating trade conflict is becoming an increasingly realistic downside risk that could weigh on sentiment and capital spending," said Societe Generale analyst Guy Stear.
Fund managers have cut equity allocations to the lowest level since November 2016, and 60 per cent of investors see a trade war as the biggest risk for markets, Bank of America Merrill Lynch's latest monthly poll showed.
The dollar was flat at 94.55 against a basket of six major currencies, paring small gains booked during early morning trade. The currency rose to a 12-month high of 95.53 in late June and has rallied more than 5 per cent in the past three months.
The dollar traded up 0.2 per cent against the yen at 112.50 yen , having neared a six-month high of 112.80 yen reached on July 13. The dollar's gains this year have been capped by worries over the intensifying trade dispute between the US and China.
The IMF had warned on Monday that escalating trade conflicts threatened to derail economic recovery and depress medium-term growth prospects.
Analysts are uncertain how the Fed would react if the trade conflict with China worsens, either with aggressive rate increases because of the inflationary effect of the import tariffs or with a pause in the cycle because of growth dampening.
"If it worsens, I expect that the US dollar would initially appreciate as the result of a flight into safe havens, with it probably benefiting even more in case of aggressive rate hikes," said Thu Lan Nguyen, an FX strategist at Commerzbank in Frankfurt. REUTERS