Forex – Dollar Edges Higher Amid Talk of Negative Rates

© Reuters.  © Reuters.

By Peter Nurse – The U.S. dollar was marginally higher in early European trade Wednesday, ahead of an eagerly-anticipated speech by Federal Reserve Chairman Jerome Powell later in the day.

At 2:50 AM ET (0650 GMT), the , which tracks the greenback against a basket of six other currencies, stood at 99.972, up 0.02%, while rose 0.03% to 1.0850. pushed 0.3% higher to 1.2297, and gained 0.03% to 107.16.

Powell will speak as a guest at a streaming event held by the Peterson Institute of International Economics at 9:00 AM ET (13:00 GMT),. a day after U.S. President Donald Trump again pushed the Federal Reserve to adopt negative interest rates, a subject which gained prominence last week when U.S. money market instruments started to price in a chance of the fed funds rate dropping below zero next year.

Last week saw U.S. unemployment rise by another three million, bringing the total of people claiming benefits to 33 million since the start of the coronavirus crisis, around the levels of the Great Depression. Consumer prices also dropped 0.8% in April, raising the possibility of deflation as the economy sinks deeper into recession.

This has all fueled the debate about policy responses and putting pressure on the Fed to do more.

Several members of the Federal Reserve have already expressed their skepticism this week that rates below zero would be an effective remedy for the economic damage of the pandemic.

“We should expect (Powell) to reject negative rates once again,” said analysts at Danske Bank, in a research note. “However, if he opens the door in light of the deep recession and the big drop in core inflation we saw yesterday, we should expect to see a strong rally in the front-end of the U.S. curve.”

“I would advise against negative rates. Japan has done that but the perception here is that it wasn’t so good,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui (NYSE:) Trust Asset Management, told Bloomberg.

“But what’s worrying is that Trump is now talking about them. Looking at past examples, the Fed has eventually done what Trump wanted quite often.”

Elsewhere, came off the three-week low it posted on Tuesday after quarterly GDP data were marginally less bad than expected. The currency remains under pressure, however, after Treasury chief Rishi Sunak unveiled what could be a hugely expensive expansion of the government’s wage subsidies for furloughed workers on Tuesday.

The dollar also surged against the after the Reserve Bank of New Zealand announced a big expansion of its quantitative easing program.

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