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US dollar drops to one-month low

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THE US dollar fell to a one-month low on Thursday on growing concerns that US policymakers may be raising interest rates just as the world's biggest economy faces a slowdown.

London

THE US dollar fell to a one-month low on Thursday on growing concerns that US policymakers may be raising interest rates just as the world's biggest economy faces a slowdown.

While the Federal Reserve raised interest rates for the fourth time in a year and officials signalled they may hike three more times by early 2020, bond markets marked increased expectations the US economy may be running out of steam.

The US bond yield curve - a widely considered indicator of future recessions - flattened to 10 basis points and just a shade above an 11-year low set earlier this month with an inversion widely considered as a harbinger of recession.

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Further fuelling growth concerns was a view that favourable investment flows such as repatriation investments from US companies was slowing substantially. "The Fed seems to be suggesting there is more risk to their reaction function than to remain on auto-pilot on interest rates for next year with flow trends also acting as a headwind for the greenback," said Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch in London.

Repatriation flows peaked at nearly US$300 billion in the first quarter of 2018 but has shrunk to nearly a third at US$93 billion in the September quarter, according to latest US data.

The dollar fell 0.8 per cent against its rivals to 96.258, its lowest level in a month. On a daily basis, it is set for the biggest percentage drop in six weeks.

Sweden's currency led gainers with the krona jumping more than 1.5 per cent against the dollar on Thursday after the central bank raised interest rates for the first time in more than seven years.

A rate hike by the Riksbank was not a consensus view in the foreign exchange markets, with a Reuters poll showing two thirds of analysts expected the Riksbank to keep rates unchanged. The remainder predicted a tightening.

Sweden's decision to raise interest rates also fuelled expectations that other major central banks will also hike policy rates next year with the Bank of England and the European Central Bank emerging as the most likely candidates.

The euro rose 0.8 per cent to US$1.1471 building on gains on Wednesday on news that Italy had struck a deal with the European Commission over its contested 2019 budget and some solid trade data this week.

Sterling gained 0.6 per cent to US$1.2688. REUTERS