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FOREX-Dollar slips after biggest weekly drop in 4 months on dovish Fed

Saikat Chatterjee

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

LONDON, June 24 (Reuters) - The dollar fell against its rivals on Monday after sustaining its biggest weekly drop in four months last week as the U.S. central bank opened the doors for a likely rate cut as early as next month.

The greenback has been on the receiving end of a broad market selloff in major currencies as global central banks led by the U.S. Federal Reserve signalled a dovish outlook on monetary policy due to growing signs of a weak global economy.

On Monday, the dollar slipped 0.2% against a basket of its rivals at 96.028. It fell 1.4% against other currencies last week, its biggest weekly drop since mid-February.

"If the Fed embarks on a rate-cutting cycle, the dollar will weaken more because of the cushion room that the United States has relative to other economies where central banks are a bit more constrained to ease policy," said Constantin Bolz of wealth manager Portfolio Concepts.

Bond markets expect the Fed to cut interest rates by 75 basis points through the end of the year, which would compress the gap between yields of ten-year U.S. bonds and comparable German government debt, currently at 234 basis points.

Investors also focused their attention on whether Washington and Beijing could resolve their trade war at a summit in Japan later this week.

Markets believe that if the United States and China fail to call a truce, then the Fed will be forced to cut interest rates to prevent a wider economic slowdown resulting from higher U.S. tariffs on imports.

Latest weekly positioning data confirmed that view.

While hedge funds have turned mildly bearish on the outlook for the dollar in the latest weekly positioning data, they have ramped up bearish bets against currencies such as the Australian dollar on fears of rising challenges for the global economy.

Both China and the United States should make compromises in trade talks, Chinese Vice Commerce Minister Wang Shouwen said on Monday.

Elsewhere, the euro stretched its rally last week, when it added 1.4%, rising about 0.15% to $1.1386, its highest since March 22. It last traded at $1.1381.

The pound was broadly steady as the leadership contest for the ruling conservative Party entered its final stretch with Jeremy Hunt facing rival Boris Johnson to replace outgoing Prime Minister Theresa May.

Against the dollar, the pound was broadly steady at $1.2751 while it was a shade weaker against the euro at 89.31 pence.

(Reporting by Saikat Chatterjee Editing by Mark Heinrich)