FOREX-Dollar drifts as Fed's Powell seen wading into negative rates debate

FOREX-Dollar drifts as Fed's Powell seen wading into negative rates debate

Reuters  | May 13, 2020 18:40

FOREX-Dollar drifts as Fed's Powell seen wading into negative rates debate

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

(Adds quotes, background, graphic)
By Saikat Chatterjee and Julien Ponthus
LONDON, May 13 (Reuters) - The dollar steadied below a
three-week high on Wednesday as investors waited for a speech
from Federal Reserve Chairman Jerome Powell after U.S. President
Donald Trump called for the introduction of negative interest
rates.
Although some U.S. policymakers have spoken against negative
interest rates, two-year U.S. Treasury yields US2YT=RR fell to
a record low of 0.105% last week and 2021 Fed fund futures
contracts 0#FF: are skirting negative territory.
Trump on Tuesday called for his country to "accept the gift"
of negative rates - as data showed that U.S. consumer prices
dropped 0.8% in April, the largest decline since December 2008
when the economy was in the throes of a recession, fuelling the
debate over the policy response. "The central banker might use the opportunity to nip the
negative rates chatter in the bud," wrote CMC Markets analyst
David Madden, with many investors expecting a rebound in the
dollar should Powell decide to do so.
Against a basket of rivals =USD , the dollar index was flat
at 100.02, hovering below the three-week high of 100.44 hit on
Tuesday. The greenback has gained more than 5% from an early
March low of 94.63.
"If push comes to shove, the Fed would of course consider
negative interest rates, too, but they are likely to be on the
bottom of the Fed's list of possible options when it comes to
supporting the financial system or the economy further," said
Commerzbank strategist Antje Praefcke.
The euro edged down 0.1% to $1.0840 against the dollar
EUR=EBS after euro zone industrial production suffered its
steepest monthly fall on record in March as coronavirus
containment measures hit activity severely.
While the dollar has benefited from safe-haven flows amid
the market turmoil, the outlook remains divided, with hedge
funds holding their short bets on the currency while
institutional investors remain bullish. Powell is due to speak on a webcast hosted by the Peterson
Institute for International Economics at 9 a.m. (1300 GMT).
Until now, Fed officials have said they do not see a need to
cut interest rates below zero and some market players expect
Powell to stick to that script.
"But what's worrying is that Trump is now talking about
them. Looking at past examples, the Fed has eventually done what
Trump wanted quite often," said Hiroyuki Ueno, senior strategist
at Sumitomo Mitsui Trust Asset Management.
Elsewhere, the British pound trimmed earlier gains to
$1.2273 GBP=D4 as bond yields fell after data showed the
economy contracted by a record 5.8% in March even though
household consumption dropped less than feared by some market
participants. Sweden's krona was flat against the euro EURSEK=D3 and
fell 0.2% against the dollar SEK=D3 after inflation slid to
its lowest pace in at least 30 years in April, below analyst
forecasts. The New Zealand dollar NZD=D3 slumped 0.9% to $0.6018
against the U.S. dollar after the central bank expanded asset
purchase to NZ$60 billion from NZ$33 billion while its policy
minutes said that negative interest rates were a future option.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
CFTC Dollar positions IMAGE https://tmsnrt.rs/3fJQyx1
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

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