Dollar edges up as US yields rise on pared bets for deep rate cuts

The dollar edged toward a three-week high against a basket of major currencies on Wednesday, as an unwinding of bets on deep US interest rate cuts pushed Treasury yields higher.

Further gains in the greenback depend on the tone Federal Reserve Chairman Jerome Powell strikes during two days of Congressional testimony starting later on Wednesday.

Expectations for a 50 basis point rate cut at a Fed meeting later this month have evaporated, but investors still expect a 25 basis point rate cut due to weak inflation and worries about the US-China trade war.

The dollar could continue to edge higher if Powell's comments on the US economy are perceived as neutral or even slightly hawkish, which would support the argument that additional rate cuts will be limited.

Renewed strength in the dollar would be an extra worry for the British pound, which is stuck near a six-month low due to uncertainty over how Britain will avoid a messy no-deal exit from the European Union.

“A break in Treasury yields above 2 per cent is a sign the dollar can continue to rise,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.

“The most important event is Powell's comments. An unwinding of long Treasury positions is pushing up yields and supporting the dollar.”

In Asian trading, the index that tracks the greenback against six other major currencies was at 97.518 after touching 97.588 on Tuesday, which was the highest since June 19.

The dollar edged up to 108.975 yen in Asia, which was its strongest level since May 31.

The benchmark 10-year Treasury yield was at 2.067 per cent, up from a 2-1/2-year low of 1.9390 per cent reached on July 3.

Stronger-than-expected employment growth in June tempered expectations that the Fed would opt for aggressive rate cuts at a meeting ending July 31.

The probability of a 25 basis point cut was 97.5 per cent on Wednesday, with a 2.5 per cent chance of a 50-point cut. A week prior, those forecasts were 75 per cent and 25 per cent respectively.

Traders will also closely scrutinise the release later on Wednesday of minutes from the Federal Open Market Committee's previous meeting.

Sterling was last quoted at $1.2455 after skidding to a new six-month low of $1.2439 on Tuesday, with Brexit jitters and growing expectations of a Bank of England rate cut adding to the currency's weakness.

Against the dollar, the euro was little changed at $1.1204 after hitting $1.1194, which was the lowest in nearly three weeks.

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