The dollar pared gains against its major peers on Tuesday, edging lower as investors awaited Federal Reserve Chairman Jerome Powell’s first congressional testimony for any clues on the pace of U.S. interest rate rises.
Powell will testify on the economy and monetary policy before the U.S. Senate Banking Committee at 1400 GMT on Tuesday, followed by a testimony at the same time on Wednesday to the House of Representatives Financial Services Committee.
“It seems that the markets are focusing on whether or not the trade war between the U.S. and China may affect the outlook for the Fed’s tightening,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“Powell, who is Republican and close to the Trump administration, will not stress much about the negative side of the U.S.-China trade war,” said Yamamoto, who expects dollar-yen to gradually strengthen to 115.
Powell is likely to reaffirm the Fed’s gradual monetary tightening policy in his testimony, although any suggestion of caution on trade could put a dent in the market’s appetite for risk.
On Tuesday, the dollar traded basically flat at 94.51 against a basket of six major currencies, paring small gains booked during early morning trade.
The U.S. currency strengthened 0.1 percent against the yen to 112.4 yen, ticking up to a six-month high of 112.80 yen reached on July 13. Japanese markets reopened after a holiday on Monday.
The dollar’s gains have this year been capped by worries over the intensifying trade dispute between the United States and China, although the concerns have not derailed the greenback’s solid performance so far.
The International Monetary Fund had warned on Monday that escalating and sustained trade conflicts following U.S. tariff actions threaten to derail economic recovery and depress medium-term growth prospects.
“Back in the 1980s or 1990s, when Japan had trade conflicts with the U.S. in the automotive and the semiconductor space… the U.S. made huge downward pressure on the U.S. dollar,” said Osamu Takashima, head of G10 FX strategy, Japan at Citigroup Global Markets Japan.
“This time, the relations between China and the U.S. is probably more complicated,” he said.
On Tuesday, the Australian dollar traded nearly flat, edging 0.02 percent lower to $0.7419.
The New Zealand dollar gained 0.8 percent to $0.6833, its highest level since hitting 0.6835 per dollar on July 11.
The euro and British pound were also barely changed against the greenback. The single currency added 0.01 percent to $1.17125, while the pound was up 0.04 percent at $1.3242.
“It seems that the dollar-yen is kind of immune to the Chinese risk at the moment,” said Mizuho Securities’ Yamamoto.
But “there is a risk that if the Shanghai Composite Index remains weak and the renminbi keeps depreciating, it will cap the Australian dollar’s top side,” he said.