The dollar was on the defensive against its rivals on Wednesday as traders looked to Federal Reserve Chairman Jerome Powell’s speech amid rising speculation the United States could one day adopt negative interest rates.
Risk-sensitive currencies lacked momentum as a warning from a top U.S. health official about the dangers of reopening the economy too soon served as a reminder of the uncertainties facing an economy that has been ravaged by the novel coronavirus.
The dollar traded at 107.15 yen, having slipped from Tuesday’s peak of 107.76, its highest since April 24.
The euro changed hands at $1.0848 after having gained about 0.4% in the previous session.
U.S. President Donald Trump on Tuesday again pushed the Federal Reserve to adopt negative interest rates, a hot topic in financial markets since last week when U.S. money market instruments started to price in a chance of negative rates.
U.S. consumer prices dropped 0.8% in April, the biggest since the Great Recession, raising the specter of deflation as the economy sinks deeper into recession and fuelling the debate about policy responses.
“I would advise against negative rates. Japan has done that but the perception here is that it wasn’t so good,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.
But what’s worrying is that Trump is now talking about them. Looking at past examples, the Fed has eventually done what Trump wanted quite often.
Powell will be speaking on current economic issues in a webcast hosted by the Peterson Institute for International Economics at 9:00 a.m.
Although Fed officials have said they do not see a need to cut interest rates below zero – investors think that will become an option especially if the coronavirus outbreak leads to further deterioration in the U.S. economy.
Top U.S. infectious disease advisor Anthony Fauci on Tuesday warned Congress that a premature lifting of lockdowns could lead to additional outbreaks of the deadly coronavirus.
His comments cast a shadow on optimism in financial markets in recent weeks that the worst period of the epidemic is over and the economy can only get better.
U.S. stock prices also slid, led by high-flying technology shares, adding to the cautious mood on the economic outlook.
That put a brake on a rally in risk-sensitive currencies such as the Australian dollar.