US dollar weakens as rate cut bets mount

London

THE US dollar weakened to its lowest since mid-April on Tuesday as investors bet the Federal Reserve could soon cut interest rates, while concerns about global growth encouraged investors to buy the safe-haven yen.

The euro rose on the back of US dollar weakness but lower-than-expected eurozone inflation in May brought the single currency's rally to a halt.

The benchmark 10-year US Treasury yield fell to its lowest since September 2017 overnight after St Louis Federal Reserve president James Bullard said a rate cut "may be warranted soon" given weak US inflation and the threat global trade tensions pose to economic growth.

The Japanese yen has been the main beneficiary from a shift towards assets investors deem safer. It rose as much as 0.2 per cent to 107.84 yen per US dollar, its strongest since Jan 10.

The US dollar index, which measures the greenback against a basket of currencies, slipped to 96.995, its weakest since April 18, before recovering as the euro reversed its gains.

"As long as it (the dollar) is at the centre of the trade conflict, US yields fall due to concerns about real economic effects and the market is literally calling out for rate cuts, there are no positive arguments supporting the dollar," Commerzbank analyst Antje Praefcke said.

Other strategists are less bearish on the US dollar, arguing that rate cuts have already been priced in and noting that if global growth does worsen, the US dollar should benefit from its safe-haven credentials.

The euro pulled back from six-week highs after weaker than expected flash consumer price inflation for the month of May but was still 0.1 per cent firmer at US$1.1247 by 1030 GMT.

The European Central Bank meets on Thursday, where investors will look to see how concerned policymakers are about signs of a downturn in growth.

Some analysts remain cautious on the euro, seeing its fortunes largely tied to the outlook for rate cuts by the Fed, which has more space for monetary easing than the ECB does.

"We still see the policy background in the eurozone leaving the euro as the anti-dollar," said Adam Cole, currency strategist at RBC Capital Markets, predicting euro/US dollar could fall to US$1.10 before finishing the year at US$1.14 - still firmly within its current trading range.

The Australian dollar was little changed, at US$0.6977 , after the Reserve Bank of Australia cut interest rates to a record low of 1.25 per cent, as expected. The pound rose 0.1 per cent to US$1.2673, up from a five-month low of US$1.2560 set on Friday. However, it slid to a 20-week low against the euro. REUTERS