US dollars
A slew of US data on manufacturing, home prices and consumer confidence have all fallen short of economist estimates, underscoring the toll of Fed tightening. Image Credit: Agency

New York: A gauge of the dollar dropped to a three-week low as traders bet the Federal Reserve will temper the pace of its rate hikes amid signs the world’s biggest economy is starting to slow.

The Bloomberg Dollar Spot Index fell as much as 0.7 per cent, sliding along with benchmark Treasury yields for a second day. Traders are pricing the upper bound of the Fed’s target range will peak at about 5 per cent compared with almost 5.20 per cent last week.

The repricing is benefiting currencies such as the euro and the pound, with the common currency advancing past parity with the US dollar for the first time since September 20. Sterling jumped as much 1 per cent to $1.1588, the highest level since September 14.

A slew of US data on manufacturing, home prices and consumer confidence have all fallen short of economist estimates, underscoring the toll of Fed tightening. Meanwhile, Federal Reserve officials have sounded a more cautious note, with San Francisco Fed President Mary Daly saying last week that policymakers should start planning for a reduction in the size of interest-rate increases.

“Market participants are more seriously questioning for how long the Fed will persist with the faster pace of rate hikes,” MUFG currency analyst Lee Hardman wrote in a note. “It leaves the US dollar vulnerable to a further correction lower in the near-term especially if the upcoming slowdown in the pace of hiking is confirmed by Fed speakers.”

‘Over-tightening’

The 10-year Treasury yield fell as much as 8 basis points 4.02 per cent, down from this month’s high of 4.34 per cent The euro was 0.6 per cent stronger at $1.0024 as of 9:24 am in London.

Traders will also be eyeing upcoming US data including new home sales data later Wednesday, one of the first sectors in the economy that stands to get hit as borrowing costs rise.

“Markets haven’t got much conviction and fuel to chase hawkish Fed trades right now especially when you’re seeing warning shots around ‘over-tightening’ fears in housing data,” said Viraj Patel, a senior strategist at Vanda Research in London. “So we’re starting to see 10-year yields drift lower.”