NEW YORK (Reuters) - The U.S. dollar was modestly lower on Tuesday after Federal Reserve Chair Jerome Powell alluded to the possibility of an interest rate cut in the face of economic risks, including the global trade war.
The U.S. central bank will respond “as appropriate” to trade - and other - headwinds, Powell said in a brief statement included as part of a speech on broader monetary policy issues. Powell said the Fed was “closely monitoring the implications” of the trade dispute that has, since the Fed’s last meeting, disrupted global bond and equity markets and posed risks to U.S. and world economic growth.
The dollar index, which measures the greenback against a basket of six rival currencies, was last 0.09% lower on the day at 97.057.
“Powell’s comments will be seen as slightly dollar negative but we might not see much of a move today because the greenback already fell yesterday after (St. Louis Federal Reserve President James) Bullard. His comments are not as aggressively dovish as Bullard’s yesterday but he does reiterate the same concerns: trade tensions and low inflation,” said John Doyle, vice president of dealing and trading at Tempus, Inc.
The dollar fell on Monday to a five-month low against the Japanese yen after Bullard said an interest rate cut “may be warranted soon,” given the rising economic risk posed by global trade tensions, as well as tame U.S. inflation. The yen was last at 108.05, roughly unchanged from the prior session.
“We are likely seeing the beginning of coordinated Fed-speak to prep market participants for at least one rate cut this year,” said Doyle.
The economic consequences of the trade war were seen in a survey on Monday that showed a measure of national factory activity dropped to a 31-month low in May. On Tuesday, the Commerce Department reported that new orders for U.S.-made goods fell in April and shipments dropped by the most in two years, indicating continued weakness in manufacturing that could undercut the broader economy.
“This is a big reversal from where we were 6 to 8 months ago when the fear (was) that the Fed was going to raise rates regardless of economic conditions,” said Joseph Sroka, chief investment officer at NovaPoint Capital.
The pound climbed from a five-month low on Tuesday but concerns about a disorderly departure from the EU meant gains were modest, amid promises from U.S. President Donald Trump of a “phenomenal” post-Brexit trade deal. It was last trading up 0.32% at $1.270.
Reporting by Kate Duguid and Tommy Wilkes; Editing by Chizu Nomiyama