Dollar weak as U.S. Treasury yield curve inversion sparks recession fears

Dollar weak as U.S. Treasury yield curve inversion sparks recession fears

The longest-duration Treasury bond (meaning fixed-interest debt backed by the USA government) is 30 years. It was 0.6 percent off a 17-month peak of 97.693 touched on November 12.

The Australian dollar, viewed as a barometer of Chinese growth, gave up early gains to trade 0.26 percent lower.

The Dow retreated 3.1 percent and the Nasdaq sank 3.8 percent on Tuesday. A hint at rate cuts coming down the pipeline would offer much needed breathing room for emerging market (EM) currencies and move funds from US government bonds to other havens of interest returns causing them to appreciate against the dollar.

Following Wall Street's overnight tumble, S&P e-mini futures nudged up 0.4 percent in Asian trade on Wednesday.

According to the San Francisco Fed, each of the nine US recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields.

Global stocks sank and the dollar fell on Tuesday as a flattening Treasury yield curve sparked recession warnings, while optimism that the USA and China would quickly resolve their trade dispute dwindled.

US investors received a red flag Monday when the yield on five-year Treasury notes dipped below the yield on three-year and two-year Treasury notes for the first time since 2007.

U.S. Federal Reserve officials convinced the massive U.S. bond market has fundamentally changed in the last decade are about to test their commitment to that idea against investors who have begun betting against the U.S. central bank's ability to continue raising interest rates. Economist Will Denyer of Gavekal Research notes that the yield curve has flattened, and eventually inverted, before every USA recession since the mid-1950s (see chart below).

According to the Cleveland Federal Reserve, an inverted yield curve has preceded the last seven US recessions.

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"Inversion of that curve is the real recession red flag", said Neil Wilson, the chief market analyst at Markets.com.

The greenback has enjoyed months of unrivaled performance against its peers but that could be undermined by growing concern about slowing USA growth.

British Prime Minister Theresa May suffered embarrassing defeats on Tuesday at the start of five days of debate over her plans to leave the European Union that could determine the future of Brexit and the fate of her government.

A Reuters report quoted two traders saying that there was better outlook for the yellow metal.

As doubts grew over whether the two sides can resolve their differences, China said on Wednesday it was confident that it can clinch a trade deal with Washington within the 90-day negotiating window that the two sides agreed.

The outlook for US growth, by contrast, he said remained strong.

The dollar index, which measures the greenback against six major peers, was down 0.07 per cent to 96.9680.

The threat of slowing economic activity also weighed on oil prices.

USA crude futures were down 0.8 per cent at US$52.82 (RM219.81) per barrel.

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