Dollar Edges Higher, Yen also in demand

The U.S. dollar moved up on Tuesday, aided by increased geopolitical tensions, but fell to a two-month low against the Japanese yen as the market continued to price in a less aggressive Federal Reserve tightening path.

The Dollar Index, which measures the value of the U.S. currency against a basket of six other currencies, rose 0.1 per cent to 105.440, slightly above the one-month low of 105.03 recorded in early trade.

The dollar has received modest demand from safe-haven movements ahead of U.S. House Speaker Nancy Pelosi’s upcoming trip to Taiwan.

Currencies

As a result, the riskier currencies experienced a setback on Tuesday, with EUR/USD falling 0.2 per cent to 1.0236 and GBP/USD falling 0.3 per cent to 1.2207, both down from a five-week high touched overnight.

However, the USD/JPY plummeted 0.6 per cent to 130.81, its lowest level since June 6, with the pair down 4 per cent in the previous four sessions due to its sensitivity to the yield differential between U.S. and Japanese governments bonds.

The benchmark 10-year U.S. Treasury yield fell to 2.52 per cent early Tuesday, its lowest level since April, as traders digested recent U.S. economic data deterioration to reassess the probable future path of U.S. interest rates.

It follows last week’s very disappointing second-quarter GDP data in the United States, the second negative quarter in a row, which could indicate that the Federal Reserve will soon start worrying more about an economic slowdown.

As expected, the AUD/USD fell 1% to 0.6952 after the Reserve Bank of Australia authorized a third consecutive half-point interest rate increase. However, comments from RBA Governor Philip Lowe were interpreted as dovish, as he stated that the bank is not on a pre-determined path to tightening policy and will instead take a data-driven approach.