U.S. Dollar Weakens as Yield Curve Is Seen Flattening

By Daniel Kruger Features Dow Jones Newswires

The U.S. dollar fell as October durable goods orders unexpectedly declined and as many investors expect the U.S. yield curve to continue to flatten, which frequently correlates with a weaker currency.

Continue Reading Below

The Wall Street Journal Dollar Index, which tracks the U.S. currency against a basket of 16 others, fell 0.5% to 86.86. The U.S. currency's weakness was broad-based, as it lost 0.4% against the euro and 0.7% against the Japanese yen.

The declines came as orders for long-lasting factory goods decreased 1.2% from the prior month compared with a 0.2% increase forecast by economists surveyed in a Wall Street Journal poll. The fall follows a 2.2% increase in September.

Another factor weighing on the dollar is a shrinking gap between two- and 10-year U.S. government bond yields, which many investors assess as a barometer for future economic growth. The so-called yield curve is hovering near the flattest since November 2007.

The gap has narrowed as two-year Treasury yields, which are sensitive to expectations for central bank policy, have risen as the Federal Reserve has raised interest rates, while 10-year yields have remained relatively low as investors see few signs of a rapid pick up in growth and inflation.

A flattening yield curve suggests the Fed may have less room to raise interest rates. Higher rates tend to attract yield-hungry investors to a currency.

Continue Reading Below

"We're going to see ongoing curve flattening," said Ilya Gofshteyn, a macro strategist at Standard Chartered Bank.

The gap had widened after the 2016 election as 10-year yields jumped on investors' bets that President Donald Trump's plans for stimulative fiscal policy, including increased infrastructure spending, would lead to an increase in U.S. inflation. Since Mr. Trump took office, and "as it became apparent none of these things were happening, you've seen the curve flatten," Mr. Gofshteyn said.

Write to Daniel Kruger at daniel.kruger@wsj.com

(END) Dow Jones Newswires

November 22, 2017 12:52 ET (17:52 GMT)