Dollar Declines With U.S. Yields on Brainard, Trump Son's Emails

  • Traders await Yellen’s remarks to Congress starting Wednesday
  • BOJ boosts purchases of three-to-five-year bonds to cap yields

Swissquote Says Trump Can't Push Pro-Dollar Story Ahead

The dollar dropped for a third day as Treasury yields slipped following dovish comments from Federal Reserve Governor Lael Brainard.

The greenback lost ground against all except one of its Group-of-10 peers after Brainard sounded a note of caution over further interest-rate increases even while signaling comfort on pressing ahead soon with plans to shrink the Fed’s balance sheet. The U.S. currency was also weighed down by the release of emails by President Donald Trump’s son that said the Russian government backed his father’s presidential campaign.

“The weak USD is a mix between the Trump junior email chain and Brainard’s dovish comments,” said David Forrester, a foreign-exchange strategist at Credit Agricole CIB’s Hong Kong branch. The emails raise “some political uncertainty in the U.S. and make it even less likely that President Trump will realize his policy agenda, especially tax reform and fiscal stimulus.”

The Bank of Japan boosted purchases of bonds due in three-to-five years at its regular operations on Wednesday, seeking to cap recent yield increases in the sector. Investors are turning focus to Fed Chair Janet Yellen’s testimony to Congress Wednesday and Thursday for any guidance on further policy tightening and balance-sheet reduction.

  • Bloomberg Dollar Spot Index drops 0.2%
  • USD/JPY slips 0.4% to 113.45 in a second day of declines
    • Residual short-term USD/JPY long positions were the first to go on the break of support at the 113.69, July 5 high, says an Asia-based FX trader; adds that option-related selling seen above 113.90, approaching 114.00 strikes
    • If dollar/yen can hold the technical level of 113.10, “it can extend gains, but if it falls below that level, sentiment could change,” says Kengo Suzuki, chief forex strategist at Mizuho Securities Co. in Tokyo
      • “Consensus is for Yellen to keep the stance that sluggish prices are temporary and the Fed is set to start shrinking its balance sheet and raise rates again later in the year”
      • “If her comments are bullish, dollar/yen could test 114 as speculation is growing for Bank of Canada to raise rates today while BOJ’s meeting next week puts focus on monetary policy divergence”
  • 5-year JGB yield falls 0.5bp to -0.04%
    • BOJ raised the volume of purchases of bonds due in 3-to-5 years to 330b yen ($2.9b) from 300b yen at the previous operation for the maturities on July 5; amount was within its plan to spend 250b to 350b yen at operations for the sector
  • 10-year UST yield falls 1bp to 2.35% in its third day of declines
  • AUD/USD climbs for a fourth day, rising as much as 0.3% to 0.7664, highest since July 4, after iron-ore futures extended gains

— With assistance by Chikako Mogi, Chikafumi Hodo, and Michael G Wilson

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