Dollar struggles at 6-week low against yen as markets increase recession bets

LONDON, Aug 1 (Reuters) – The U.S. dollar fell to its lowest level in more than six weeks against the Japanese yen on Monday as investors stepped up bets that aggressive monetary policy from the Federal Reserve would tip the economy in a recession.

With traditional market recession indicators such as yield curve spreads hovering near their lows this year, bettors have stepped up bets in recent days that U.S. interest rates will peak by the end of 2022.

While China’s official measure of factory activity contracted in July as fresh virus outbreaks weighed on demand and German retail sales posted their biggest year-on-year decline. Other since 1994, sentiment was decidedly cautious at the start of trading in London. Read more

The dollar fell to its lowest level against the yen since mid-June at 132.07, down more than 5% from the peak of nearly 140 yen hit in late 1998 last month.

A broader dollar index against its rivals weakened 0.3% to 105.61, just off a low in early July, as traders trimmed long dollar positions, according to the latest weekly positioning data.

“Markets are now in the process of jostling with central banks over their efforts to aggressively raise rates in an attempt to contain inflation, with markets increasingly convinced that central banks will have to abandon their quest. inflation due to looming recessionary risks,” said Marc Ostwald, chief economist at ADM Investor Services.

The yield spread between 10-year US Treasuries and the equivalent Japanese debt remained near its tightest level in nearly four months, around 245 basis points, hurting the lure of the dollar.

Data from the end of last week sent the greenback swinging back and forth, rising initially after the personal consumption expenditure price index showed the fastest inflation since 2005, then falling after the final report from the University of Michigan – closely watched by Fed policymakers – showed consumers’ inflation expectations falling.

The big economic topic this week will be the monthly US jobs report on Friday.

The Euro was little changed at $1.0235, continuing its consolidation towards the middle of its range over the past week and a half.

The Australian dollar rose 0.3% to $0.7012 on Monday, just shy of a six-week high of $0.7032, ahead of a central bank rate hike on Tuesday where policymakers are widely expected to raise its cash rate from 50 basis points to 1.85%.

It would be the fourth hike since May and the most aggressive tightening in decades.

Reporting by Saikat Chatterjee; Additional reporting by Kevin Buckland in TOKYO; Editing by Jan Harvey

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