Mounting rate-cut bets cap dollar before G-20 meet

London

THE US dollar steadied above a recent two-and-a-half-month low on Tuesday as investors focused on a Group of 20 (G-20) summit later this month where Beijing and Washington might make some progress on trade talks.

A 3.5 per cent rally in the dollar against its rivals in the first five months of 2019 has come to a halt in recent weeks as dovish comments from Federal Reserve officials and weak economic data bolster rate-cut expectations.

Though markets are only pricing in about a 20 per cent chance of a rate cut in June, they are fully pricing in a cut by July, and more than three rate hikes by mid-2020. The next policy meeting is scheduled for next week.

Rising rate-cut bets have also prompted investors to increase holdings of other currencies, with latest positioning data showing the biggest weekly rise in euro positions in nine months.

With the dollar having weakened one per cent this month against a basket of other major currencies to hit a late-March low of 96.46 last week, investors are firmly focused on the G-20 meeting in Osaka, Japan, on June 28-29. The dollar was broadly steady at 96.80 on Tuesday.

"That meeting is now becoming the centrepiece for financial markets in the coming days," said Simon Derrick, a currency strategist at BNY Mellon in London. US President Donald Trump said on Monday he was ready to impose more tariffs if talks at the summit with China's President Xi Jinping make no progress.

Mr Trump said last week he would decide after the meeting of the leaders of the world's largest economies whether to carry out a threat to impose tariffs on at least US$300 billion in Chinese goods.

Away from the upcoming G-20 summit, investors have become more cautious of betting on further dollar weakness. "Bets of US rate cuts have been rising quickly in recent days and we think the pricing has become too aggressive so the dollar's downside is limited," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The euro was a touch firmer at US$1.1318 though a survey showed investor morale in the eurozone deteriorated sharply in June, falling well short of expectations.

Elsewhere, the British pound was lower as a leadership contest for the ruling Conservative Party got underway this week. The euro edged to a five-month high against the pound to 89.32 pence before British employment data. REUTERS