- Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
The dollar hit a near two-week low against its peers on Tuesday with sentiment soured by Federal Reserve caution on the global outlook and weak data at home, pointing to slower rate hikes.
Overnight, New York Fed President John Williams told a Q&A event that "We will be likely raising interest rates somewhat, but it is really in the context of a very strong economy.”
Williams noted that the Fed is not on a pre-set course and will adjust monetary policy to keep the economy strong with low inflation.
Last week, Fed Vice Chair Richard Clarida and Dallas Fed President Robert Kaplan raised concerns over a potential global slowdown that has seen markets betting heavily that the rate-hike cycle is on its last legs, even as the senior Fed officials signalled more interest rate increases.
The Fed executives' remarks led some traders to question whether the dollar's rally was nearing its end, with the benchmark U.S. 10 year treasury yields US10YT=RR pulling back slightly.
The dollar index, a gauge of its value versus six major peers, traded relatively unchanged at 96.22 on Tuesday. The index fell nearly half a percent last week, its biggest weekly drop since late September.
However, some analysts believe the dollar can stage a comeback.
"William's comments are justified but are not as dovish as the comments made by Clarida and Kaplan last week. The market may rethink whether it read Friday's comments as overly dovish which may lead to a reversal in dollar weakness," said Ray Attrill, head of currency strategy at NAB.
Attrill added that safe-haven buying can return to the dollar if global equities keep correcting and their volatility continues to rise.
"If we see the VIX .VIX (volatility index) at 25, I would expect the dollar to pick up steam." The index is currently at 20.10.
The greenback was also weighed by surprisingly weak housing data, which pushed down U.S. 10 year bond yields.
U.S. homebuilders' sentiment recorded its steepest one-month drop in over 4-1/2 years, suggesting that rising borrowing costs are squeezing the real estate sector.
Goldman Sachs strategists said in an outlook for 2019 that the greenback may decline as much as 6 percent against major peers with the U.S. economy slowing as the boost from tax cuts and easy credit fades through the year.
The Japanese yen JPY= changed hands at 112.60. It had hit 112.38 earlier in the trading session, its highest level in November. But analysts think that further strength in the yen is unlikely.
"We are not seeing Japanese investors retreat from the U.S. and foreign markets...flow numbers show that Japan remains close to fully invested abroad," said Attrill.
"This gives support to dollar/yen." The yen has strengthened over the last two sessions as traders rushed to the currency in the uncertainty around U.S.-China trade talks, Brexit worries, and the Italian budget standoff.
Nonetheless, the euro EUR= was well bid in early Asian trade at $1.1456. The single currency has gained two percent versus the dollar over the last five trading sessions despite the ongoing standoff between the European Union and Italy over its free-spending budget, which breaks EU fiscal norms.
Analysts have been concerned about an economic slowdown in the euro area and will be keeping a close eye on the French and German manufacturing performance data later this week.
Attrill notes that any positive surprise in these readings can make room for another leg up in the euro.
Meanwhile, sterling GBP= gained 0.1 percent to trade at $1.2860.
The pound is seen likely to trade sideways until the market gets more clarity on progress in the Brexit deal.
The Australian AUD and kiwi dollars NZD= traded relatively unchanged at $0.7293 and $06838 respectively.
