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Dollar steadies before Trump speech to Congress

By Karen Brettell and Saqib Iqbal Ahmed

NEW YORK (Reuters) - The dollar retraced earlier weakness to be little changed on Tuesday as investors awaited U.S. President Donald Trump's speech to Congress for fresh indications of his economic plans and as portfolios were rebalanced for month-end.

Investors were wary that Trump may disappoint those who expect greater detail on how he will reform the tax code as he focuses on domestic issues.

Price moves were muted as investors rebalanced portfolios for the end of the month and were hesitant to take new positions before Trump’s speech.

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“Markets are a little bit cautious,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities in Toronto. “I think it’s a mix of profit-taking ahead of Trump, and also you have month-end rebalancing flows. Those I think are the dominant drivers.”

The dollar rallied to a 14-year high soon after Trump won the U.S. election in November, boosted by hopes he would introduce large fiscal stimulus and reflationary plans, but the greenback sagged in January and the first half of this month in the absence of specifics on tax reform.

The dollar index against a basket of six major currencies <.DXY> was last down 0.03 percent at 101.10. It is on track to end February with a gain of around 1.6 percent.

Investors also focused on when the Federal Reserve is likely to next raise interest rates as a plethora of Fed officials deliver speeches this week, culminating in an address by Fed Chair Janet Yellen on Friday.

The dollar/yen has been highly correlated with U.S. bond yields, with lower Treasury yields on Tuesday helping the Japanese currency.

"The yen is still largely a U.S. interest rate story," said Erik Nelson, a currency analyst at Wells Fargo in New York. "The 10-year Treasury yield, which is just down very slightly today, probably supports the yen, at least in the near-term."

The greenback weakened 0.46 percent to 112.15 yen <JPY=> and was 0.10 percent lower against the euro <EUR=> at $1.0596.

Expectations that the U.S central bank may raise rates when it meets in March have risen in the past week on hawkish Fed statements and stronger economic data, though market pricing is still seen as being well below levels that would encourage the Fed to move.

Futures traders are pricing in only a 35 percent chance of a March rate increase, according to CME Group’s FedWatch Tool.

(Additional reporting by Saqib Iqbal Ahmed; Editing by Chizu Nomiyama)