The dollar stayed on the defensive on Monday, pinned down by expectations of a Federal Reserve rate cut this month, as traders in Asia waited for the latest update on the health of the world's second largest economy. Figures due at 0200 GMT are expected to show Chinese economic growth hitting its slowest pace in almost a generation as domestic demand falters and trade tensions bite.
Weaker-than-expected numbers for retail sales, industrial output or second-quarter gross domestic product, seen growing at 6.2% from a year earlier, could cause investors to move away from Asian currencies and the Australian dollar. "We see downside risks to the Chinese economic data, particularly infrastructure spending," Commonwealth Bank of Australia analysts wrote in a note to clients on Monday morning.
That could lift the dollar against the yuan and dent the Aussie, the CBA analysts said. Against a basket of currencies the dollar held near a 10-day low at 96.814, still pressured by comments last week from Fed Chair Jerome Powell and Chicago Fed president Charles Evans indicating US rate cuts are needed to boost inflation.
The dollar hovered around 107.80 yen, bound between support around 106.80 and resistance at 108.98. Monday is a national holiday in Japan and dollar-yen trading volumes were very thin. The euro trod water against the dollar at $1.1270, in the middle of a two-cent range where the currency has remained since June. The dollar shed 0.4% against the single currency last week, cushioned though by expectations that policy easing in Europe will follow the Fed.
"An impending interest rate cut and speculation that the US Treasury may intervene in currency markets are the twin drivers of the dollar weakness," said Michael McCarthy, chief strategist at CMC Markets in Sydney. "With the important China data due around shortly, traders will likely be cautious Monday morning," he said.
Barring a GDP surprise, investors are likely to focus more on China's June activity data for clues on whether the economy continued to weaken heading into the second half or is bottoming out. In the US, a 25 basis-point rate cut in July is priced in, along with an almost 20% chance of a 50 basis point cut. Investors will be looking to US retail sales figures due Tuesday and company earnings for signs of how shoppers and businesses are weathering the slowdown.
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