US dollar eases from 3-week high ahead of Fed speech

London

THE US dollar steadied below a three-week high on Wednesday as investors waited for a speech from Federal Reserve Chairman Jerome Powell after US President Donald Trump called for the introduction of negative interest rates.

Although some US policymakers have spoken against negative interest rates, two-year US Treasury yields fell to a record low of 0.105 per cent last week and 2021 Fed fund futures contracts are skirting negative territory.

Mr Trump on Tuesday called for his country to "accept the gift" of negative rates - as data showed that US consumer prices dropped 0.8 per cent in April, the largest decline since December 2008 when the economy was in the throes of a recession, fuelling the debate over the policy response.

"The central banker might use the opportunity to nip the negative rates chatter in the bud," wrote CMC Markets analyst David Madden, with many investors expecting a rebound in the US dollar should Mr Powell decide to do so.

Against a basket of rivals, the US dollar index was flat at 100.02, hovering below the three-week high of 100.44 hit on Tuesday. The greenback has gained more than 5 per cent from an early March low of 94.63.

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"If push comes to shove, the Fed would of course consider negative interest rates, too, but they are likely to be on the bottom of the Fed's list of possible options when it comes to supporting the financial system or the economy further," said Commerzbank strategist Antje Praefcke.

The euro edged down 0.1 per cent to US$1.0840 against the US dollar after eurozone industrial production suffered its steepest monthly fall on record in March as coronavirus containment measures hit activity severely.

While the US dollar has benefited from safe-haven flows amid the market turmoil, the outlook remains divided, with hedge funds holding their short bets on the currency while institutional investors remain bullish.

Mr Powell is due to speak on a webcast hosted by the Peterson Institute for International Economics at 9 am (1300 GMT).

Until now, Fed officials have said they do not see a need to cut interest rates below zero and some market players expect Mr Powell to stick to that script.

"But what's worrying is that Trump is now talking about them. Looking at past examples, the Fed has eventually done what Trump wanted quite often," said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management. REUTERS