United States dollar falls on economic growth fears

Federal Reserve

On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last US recession. The usually unremarkable "yield curve" made investors sit up and take notice this week as it signaled a possible recession on the horizon, sending stocks plummeting.

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets. A recession isn't destiny, in other words: The Fed could respond to the yield curve's signal by cutting rates to head off the recession.

"I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion", Williams said at the New York Fed.

The dollar has been undermined by the bond market moves and recession fears, but it has recovered from two-week lows against a basket of currencies to trade around 97, also flat on the day.

President Donald Trump suggested Tuesday that he could extend a 90-day truce in his trade war with China, while his top White House economic adviser backtracked from the president's announcement that Beijing had agreed to reduce tariffs on US -made cars. The Federal Open Market Committee, which sets the federal funds rate, will gather for a two-day meeting on December 18, where the central bank is strongly expected to hike interest rates. This happens when short-term rates rise above longer rates. "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction".

Almost everyone seems convinced the bond market will give its standard recession signal in a timely fashion.

The moves follow similar declines in USA bank shares, which dropped 4.4 per cent on Tuesday. "Keep it simple. Quantitative Tightening is bad for stocks".

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The more closely watched part of the curve-the gap between two-year and 10-year yields-remains upwardly sloped.

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession.

Benchmark Treasury 10-year yield fell to its lowest point since mid-September.

"A lot of it is momentum", said John Canavan, market strategist with Stone & McCarthy Research Associates in NY.

The term premium refers to the higher interest rate investors typically demand to commit money for longer periods of time.

Oil prices pared some gains as fears flared that demand would stall due to a trade war between the USA and China, and that Russian Federation remained a stumbling block to a deal to cut global crude supply.

"The inversion...clearly implies that there is not an insignificant chance the Fed will have to ease in the next few years".

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