The dollar traded lower 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 U.S. recession concerns.
"Market expectations for Jackson Hole and the central banking community in aggregate are extremely dovish," said Brad Bechtel, managing director at Jefferies in New York. "The U.S. market is pricing a tremendous amount of easing now, along with many other markets around the world."
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.
"We think a long yen exposure makes sense ahead of the Fed's Jackson Hole event," said Scotiabank in a research note. "If Fed Chairman Powell sounds dovish, U.S. yields and the U.S. dollar should fall; if he sounds more hawkish, safe havens should rally."
That said, market sentiment was not as distressing as that of last week, when the U.S. bond yield curve inverted, a sign that many investors say presages a recession. The curve of 2-year and 10-year Treasury yields, however, remained steeper on Tuesday, but could invert again based on past cycles.
In midday trading, the dollar fell 0.3% against the yen to 106.34 yen and was down 0.3% versus the Swiss franc at 0.9792 franc.
The dollar index was down 0.1% at 98.255 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 $1.1093 after Italy's prime minister announced his resignation on Tuesday even as he made a blistering attack on his own interior minister, Matteo Salvini, accusing him of sinking the ruling coalition and endangering the economy for personal and political gain.
George Vessey, market analyst, at Western Union Business Solutions, said growing economic and political risk in the euro zone have added to the euro's downside risks, leaving it vulnerable to hitting new lows for the year.
In early August, the euro had fallen to nearly two-year troughs. Elsewhere, the pound was down 0.1% both against the dollar and the euro, last at $1.2088 and at 91.25 pence against the euro.
British Prime Minister Boris Johnson made new waves by writing to European Council President Donald Tusk on Monday to propose replacing the Irish border backstop with a commitment to put in place alternative arrangements by the end of a post-Brexit transition period.