Dollar tracks Treasury yields lower on benign US data

The week started out with a mix of market tailwinds headlined by a U.S.-China trade truce which propelled the dollar higher, though the euphoria soon fizzled out and left currencies trading sideways.

Most of the action in the foreign exchange market came from the dollar’s moves against the South Korean won, where it fell sharply for two straight days on news that Washington and Seoul discussed the dollar/won market earlier this month.

The dollar last traded 0.14% lower at 1,394.70 won.

“Speculation is once again mounting that President Trump favours a weaker dollar, potentially pressuring other governments to allow their currencies to appreciate in trade negotiations,” said George Vessey, lead FX and macro strategist at Convera.

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“Asian currency weakness against the dollar has long been seen as an advantage for regional exporters, a stance the administration has sought to challenge.” In the broader market, the dollar was struggling to regain its footing after an overnight slide following data which showed U.S. producer prices unexpectedly fell in April. The PPI figures came on the heels of a tame consumer price reading earlier in the week, cementing bets that the Fed is likely to cut rates at least twice this year.

The euro was up 0.1% to $1.1197 while sterling steadied at $1.3309.

Against a basket of currencies, the dollar fell 0.1% to 100.70, though was on track for a marginal weekly gain of 0.3% thanks to its sharp 1.3% rise on Monday.

Markets are now pricing in roughly 56 basis points worth of Fed cuts by December, up from 49 bps the previous day.

The benchmark 10-year U.S. Treasury yield extended its 7 bps drop from overnight and was last a touch lower at 4.4413%. The two-year yield was down 1 bp to 3.9608%.

In a closely watched speech on Thursday, Fed Chair Jerome Powell said policymakers feel they need to reconsider the key elements around both jobs and inflation in their current approach to monetary policy.

“Chair Powell said that the FOMC will be placing more weight on the inflation outlook than on employment when setting monetary policy following a monetary policy framework review. This suggests a potentially higher hurdle to Fed cuts if inflation risks remain to the upside,” said Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia.

“We forecast three FOMC interest rate cuts this year. But the risks lie towards less cuts if inflation picks up.”

Elsewhere, the dollar was down 0.26% against the yen at 145.30.

Data on Friday showed Japan’s economy shrank for the first time in a year in the March quarter and at a faster pace than expected, underscoring the fragile nature of its recovery now under threat from Trump’s trade policies.

The Australia dollar was last marginally higher at $0.6406 while the New Zealand dollar ticked down 0.02% to $0.5874 and was set to lose more than 0.5% for the week.