The dollar declined on Tuesday, in line with the drop in Treasury yields, as investors braced for a potentially dovish Federal Reserve at a Jackson Hole, Wyoming, gathering later this week, with many expecting an announcement of some measure that would ease US recession concerns.
Risk aversion crept into the market a day after investors cheered the prospect of new stimulus measures from global central banks to shore up their struggling economies.
Markets also cautiously awaited Fed Chairman Jerome Powell's speech on Friday in Jackson Hole. "There are a lot of recession signs and the expectation is that Chairman Powell will address them and probably say we are looking to cut," said Juan Perez, senior FX trader and analyst at Tempus Inc in Washington.
"What the market is trying to digest is that there are serious signs that have been here with a precedent prior to a recession. Of course, the inverted curve is a major one. Ultimately, safe havens are going to keep going up," he added.
That said, market sentiment was not as distressing as that of last week, some analysts said, when the US bond yield curve inverted, a sign many investors say presages a recession.
The curve of 2-year and 10-year Treasury yields, however, was steeper on Tuesday, but could invert again based on past cycles. "We think a long yen exposure makes sense ahead of the Fed's Jackson Hole event," Scotiabank said in a research note." If Fed Chairman Powell sounds dovish, US yields and the US dollar should fall; if he sounds more hawkish, safe havens should rally."
In afternoon trading, the dollar fell 0.4% against the yen to 106.24 yen and was down 0.4% versus the Swiss franc at 0.9777 franc. The dollar index was down 0.2% at 98.166 after earlier rising to a 2-1/2-week high of 98.40. It reached its 2019 high of 98.932 at the beginning of the month.
The euro rose 0.2% against the dollar to $1.1102 after Italy's prime minister, Giuseppe Conte, announced his resignation on Tuesday even as he made a blistering attack on his own interior minister, Matteo Salvini. Conte accused Salvini of sinking the ruling coalition and endangering the economy for personal and political gain.
The pound was down 0.3% against the dollar at $1.2170 and slipped 0.1% versus the euro to 91.20 pence. British Prime Minister Boris Johnson fired the opening salvo in his bid to renegotiate the country's divorce terms from the EU, saying the "backstop" - an insurance policy included in Britain's Withdrawal Agreement with the EU to avoid the return of a hard border on the island of Ireland - should be replaced with a pledge.