NEW YORK (Reuters) - The dollar fell on Tuesday as the mood turned cautious a day ahead of Federal Reserve Chairman Jerome Powell’s speech on economic issues and as investors weighed the chances of negative U.S. interest rates.
The dollar was not necessarily being driven by safe-haven factors, analysts said, given that U.S. stocks were down and Treasury prices were higher on the day.
“The dollar is still trading within broad ranges and its weakness today could be due to caution ahead of Powell’s speech tomorrow and especially given the current talk about negative interest rates,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Although Powell and Fed officials have all but ruled out cutting interest rates below zero, several markets have started to price in such a cut. Fed funds futures on Tuesday priced in negative interest rates of about half a basis point in April 2021. <0#FF:>
The rate options market implied a 23% probability that the key federal funds rate will fall below zero by end-December, BofA Securities data showed, citing short expiry options on one-year U.S. swap rates. That compares with a 9%-10% probability last week.
In afternoon trading, the dollar index was down 0.3% at 99.959 =USD.
The dollar edged lower after data showed U.S. consumer prices dropped 0.8% in April, the largest decline since December 2008 when the economy was in the throes of a recession and marking the second straight monthly decrease in the CPI.
Overall, analysts said risk-taking has been limited by persistent concerns about the global health crisis.
New cases of coronavirus infections have been found in China, South Korea and Germany, where respective governments have eased lockdown restrictions. A re-emergence of coronavirus cases could dent a global economic recovery on the back of an injection of monetary and fiscal stimulus.
The euro was last up 0.4% against the U.S. currency at $1.0848 EUR=EBS, though not far from the $1.0636 low touched at the end of March when the pandemic sent markets into turmoil.
The dollar fell 0.5% against the yen to 107.19 JPY=EBS.
The Australian dollar AUD=D3 fell earlier, dipping to a five-day low of US$0.6432 after China banned some Australian meat imports. It later trimmed losses as Australia's trade minister played down the issue as a technicality, and was last down 0.2.% at US$0.6477.
Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and Leslie Adler