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US dollar, Treasury yields sink on the back of weak data

The US dollar and Treasury yields sustained losses on Wednesday, with investors eyeing lacklustre data ahead of an eagerly awaited Federal Reserve decision.

The buck declined 0.54 per cent against six global currencies. The losses were particularly intense against the Japanese yen, with the dollar sliding almost 1 per cent to Y109. The euro rose 0.55 per cent to $1.1276, and sterling gained 0.3 per cent to $1.2788. Mexico’s currency also strengthened above 18 pesos to the dollar for the first time since last August.

In fixed income, investors piled into Treasuries, sending yields falling. The policy-sensitive two-year yield fell 0.073 percentage point (7.3 basis points) to 1.29 per cent, while the 10-year yield tumbled 10.4 bps to 2.103 per cent. The 10-year yield was trading at levels not seen since the immediate aftermath of Donald Trump’s election last November.

Meanwhile, banks, which are thought to benefit from higher yields, saw share prices decline. The KBW banks index dropped 1.2 per cent. Bank of America, one of the biggest US lenders, was among the worst performers, sinking 1.9 per cent.

Wednesday’s moves come on the heels of data showing that inflation and retail sales both undershot expectations last month, further distorting the picture of how the economy is performing in the second quarter.

The Fed will release its policy statement at 2pm in Washington. Central bankers are broadly expected to raise interest rates, but analysts are increasingly expecting policymakers to underscore their focus on disappointing price growth even as the labour market has approached full employment.

“We still expect the Fed to hike rates this afternoon. Heading into today’s number Fed speakers generally indicated that a hike remains likely; we don’t think they’d want to appear too fickle in the face of one data print,” said Michael Feroli, chief US economist at JPMorgan Chase.

“That said, three disappointments is a crowd, and we think the post-meeting statement will have to take the recent slowing in core inflation more seriously”.