US dollar struggles at 6-week low as US rate hike prospects cool

[TOKYO] The US dollar struggled near six-week lows against at basket of currencies early on Wednesday, as expectations for a near-term US interest rate hike cooled.

The allure of US assets took a knock overnight as Wall Street indexes notched their worst day in roughly a month in the wake of unconvincing economic data.

US consumer spending rose but the markets focused more on Tuesday's lacklustre inflation numbers. Economists say this, together with weak business investment and the second quarter's anaemic economic growth pace, could encourage a cautious Federal Reserve to keep interest rates at current low levels for a while.

More pessimistic views towards the US economy hurt the greenback, as a robust economic outlook had made the United States one of the few countries ready to hike rates. Much of the other leading economies, in contrast, have been stuck in a monetary easing cycle.

"The 'risk on' trend led by strength in the United States that has supported the dollar is starting to wane," said Junichi Ishikawa, currency analyst at IG Securities in Tokyo.

The US dollar index was at 95.147, within close reach of the 6-week trough of 95.003 touched overnight.

The euro was little changed at US$1.1219 after gaining 0.6 per cent overnight to touch US$1.1234, its highest since the Brexit referendum.

The US dollar was up 0.2 per cent at 101.075 yen. It slid 1.5 per cent the previous day to a three-week trough of 100.680, amid some disappointment that a Tuesday meeting between Japanese finance minister Taro Aso and Bank of Japan governor Haruhiko Kuroda did not result in steps to weaken the yen.

Mr Ishikawa at IG Securities reckons it is matter of time before the US dollar breaks below the 100 yen threshold. The US dollar briefly slipped below the watershed mark in a knee-jerk reaction after the Brexit referendum, but it has managed to stay above ever since.

"The break below 100 yen after Brexit was an irregular move. But this time, the yen is gaining steadily on fundamental factors like Japan's improving current account balance and fading impact of BOJ's multi-dimensional easing," Mr Ishikawa said.

The Japanese central bank eased monetary policy on Friday by upping the amount of its exchange-traded fund purchases, but underwhelmed the markets by holding off from increasing the amount of government bond purchases.

The US dollar's broad weakness helped the Australian dollar as well, which rose about one per cent overnight to a near three-week high of US$0.7638 despite an interest rate cut by the Reserve Bank of Australia.

The Aussie last traded at US$0.7594, down 0.2 per cent on the day.

REUTERS