US$ subdued by easing Fed rate hike expectations

London

THE US dollar was softer on Monday, pegged back by sluggish US data that tempered expectations of a Federal Reserve interest rate hike this year.

The US currency was 0.3 per cent lower at 100.95 yen after losing 0.6 per cent on Friday, when retail sales and producer prices came in weaker than expected. The euro was up 0.15 per cent at US$1.1172, having risen 0.2 per cent on Friday.

The dollar index was weaker at 95.62 after dropping to 95.254 on Friday, its lowest since Aug 3.

US Treasury yields slid on Friday, with the 10-year yield falling five basis points to a two-week low of 1.48 per cent. It traded at 1.51 per cent on Monday.

"After the disappointing retail sales and what our economists see as downside risks to the July US consumer price inflation print on Tuesday, we see very limited scope for dollar strength against the euro and the yen," said Petr Krpata, currency strategist at ING in London.

US consumer inflation is forecast at zero month on month for July, down from 0.2 per cent in June, and annual headline inflation is also expected to slow amid lower oil prices. Last week, productivity numbers indicated subdued inflationary pressures, all of which underpinned expectations that the Fed will be in no hurry to raise rates.

Federal funds futures implied traders saw a 43 per cent chance the central bank would increase rates at its December policy meeting, down from 47 per cent before Friday's data. Traders said the Fed minutes from the July meeting and due for release on Wednesday could give investors more clues on policy.

"The weak July retail sales report should help keep the Fed on the sidelines and should also be reflected in this Wednesday's release of the Fed minutes," Morgan Stanley analysts said in a note. "There is no reason for the Fed to take on risks related to an early rate hike when its inflation expectations remain depressed."

Markets showed little reaction to data on Monday showing Japan's economy expanded 0.2 per cent year on year in the second quarter, well below expectations for 0.7 per cent.

The Australian dollar was 0.3 per cent higher at US$0.7668 , having risen to a 3-month high of US$0.7760 last week thanks in part to the country's relatively higher debt yields. REUTERS