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Dollar slides for third day on U.S. rate cut bets

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07/12/2019 | 03:35pm EDT
A trader shows U.S. dollar notes at a currency exchange booth in Peshawar

NEW YORK (Reuters) - The dollar weakened for a third straight session on Friday, still pressured by expectations the Federal Reserve will start cutting interest rates at a monetary policy meeting later this month.

Against a basket of other currencies <.DXY>, the dollar fell 0.1% to 97.004, posting its worst daily loss against the yen and Swiss franc in more than three weeks.

The dollar briefly trimmed losses after U.S. data showed producer prices rose slightly in June, up 0.1% following a similar gain in May. In the 12 months through June, the PPI rose 1.7%, the smallest gain since January 2017.

Joe Manimbo, senior market analyst, at Western Union Business Solutions in New York said the PPI increase should not shake U.S. rate cut expectations.

Until the Fed's preferred gauge of inflation, the core personal consumption expenditures price (PCE) index, shows convincing signs of heating up from a low 1.6%, the Fed is unlikely to change its stance on cutting rates this month, he added.

The producer prices data followed a report on Thursday showing the core U.S. consumer price index, excluding food and energy, rose 0.3% in June, the largest increase since January 2018.

The CPI reading pushed U.S. Treasury yields higher, but money markets still indicated one rate cut at the end of July and a cumulative 64 basis points in cuts by the end of 2019, especially after Fed Chairman Jerome Powell flagged such a move in his two-day testimony before Congress this week.

That should be dollar-negative in general, analysts said.

But Jane Foley, head of FX strategy at Rabobank in London, believes dollar weakness will not be as severe as many anticipated because other major central banks are easing as well.

"The dovish stances of most other G10 central banks is offsetting the impact of potential Fed action on the U.S. dollar crosses," Foley said, noting, for instance, that she expects the European Central Bank to cut its discount rate further into negative territory at its September meeting.

The euro, as a result, has been on a downtrend since the beginning of the year, down 1.7%.

However, the single currency on Friday rose 0.2% versus the dollar to $1.1271, after earlier slipping following comments from ECB Governing Council member Ignazio Visco saying the bank will need to adopt further expansionary measures if the euro zone economy does not pick up. He said the ECB will consider its options "in the coming weeks."

The market has also been monitoring Fed speakers. Chicago Fed President Charles Evans on Friday said the U.S. economy still has "very solid fundamentals" with a vibrant labor market. He said he viewed the Fed's monetary policy as neutral, but it could be more accommodative if the goal is to lift inflation.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Editing by David Gregorio and Jonathan Oatis)

By Gertrude Chavez-Dreyfuss

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