U.S. policy key for dollar stuck below one-year highs
* Dollar pares morning gains against basket of major
* Investors await Powell testimony
* Concerns mount over impact of trade war
* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
(Recasts, adds context, updates figures)
By Tom Finn
LONDON, July 17 (Reuters) - The dollar held steady below a
one-year high on Tuesday as investors grew wary about the
currency's outlook after a recent rally and concerns that U.S.
economic momentum could peak soon.
A key market focus on Tuesday is congressional testimony by
Federal Reserve Chairman Jerome Powell, with traders watching
for clues on the pace of U.S. interest rate rises as well as
risks from trade conflicts.
Powell will testify on the economy and monetary policy
before the U.S. Senate Banking Committee at 1400 GMT.
He is expected to deliver an upbeat message on the outlook
for growth and reaffirm the Fed's gradual monetary tightening
policy, but he could face tough questions on the central bank's
independence and how it would deal with an escalation in the
global trade war.
"The escalating trade conflict is becoming an increasingly
realistic downside risk that could weigh on sentiment and
capital spending," said Societe Generale analyst Guy Stear.
Fund managers have cut equity allocations to the lowest
level since November 2016, and 60 percent of investors see a
trade war as the biggest risk for markets, Bank of America
Merrill Lynch's (BAML) latest monthly poll showed.
The dollar was flat at 94.55 against a basket of six
major currencies, paring small gains booked during early morning
The currency rose to a 12-month high of 95.53 in late June
and has rallied more than 5 percent in the past three months.
The dollar traded up 0.2 against the yen at 112.50 yen
, having neared a six-month high of 112.80 yen reached on
The dollar's gains this year have been capped by worries
over the intensifying trade dispute between the United States
and China, though the concerns have not derailed the greenback's
solid performance so far.
The International Monetary Fund had warned on Monday that
escalating and sustained trade conflicts after U.S. tariff
action threaten to derail economic recovery and depress
medium-term growth prospects.
Analysts are uncertain how the Fed would react if the trade
conflict with China worsens: either with aggressive rate
increases because of the inflationary effect of the import
tariffs or with a pause in the cycle because of growth
"[If the trade war worsens] I would expect that the U.S.
dollar would initially appreciate as the result of a flight into
safe havens, with it probably benefiting even more in case of
aggressive rate hikes," said Thu Lan Nguyen, an FX strategist at
Commerzbank AG in Frankfurt.
Another factor weighing on the dollar's outlook has been
concern that the U.S. economy may be slowing.
The yield differential between 10-year U.S. Treasury yields
and two-year maturities was at 25 basis points, near its lowest
since August 2007. Narrowing spreads are taken as an indicator
of a slowing economy.
Other major currencies traded in narrow ranges.
The euro and British pound rose modestly
against the dollar. The European single currency added 0.1
percent to $1.1720 after weakening half a percent last week. The
pound, meanwhile, was up 0.2 percent at $1.3205.
The British currency was lifted by broad dollar weakness,
though gains were capped by data on slowing British pay growth
and overnight Brexit headlines.
The Australian dollar fell 0.2 percent to $0.7406.
The currency is down more than 5 percent since the start of the
year because of a divergence in the interest rate outlook of the
U.S. Federal Reserve and Australia's central bank, which is seen
keeping policy steady for some while yet.
The New Zealand dollar, meanwhile, gained 0.8
percent to $0.6839, its highest level since hitting 0.6835 per
dollar on July 11. Annual core inflation in New Zealand
accelerated for the third straight quarter and registered its
largest increase since 2011.
(Editing by Peter Graff and David Goodman)
First Published: 2018-07-17 03:03:43
Updated 2018-07-17 13:47:50
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