FOREX-Dollar falls as U.S. yields fall; investors mull recession risk

TOKYO Reuters - The dollar fell against most major peers on Wednesday as a decline in U.S. yields took some of the sheen off the currency, with investors mulling the risk of a recession due to aggressive Federal Reserve rate hikes.

The dollar index, which measures the dollar against six counterparts, fell 0.08% to 104.39, giving back some of its 0.53% rally overnight, mainly due to weakness in the euro.

Treasury 10 year yields dropped more than 1 basis point in Tokyo, moving to around 3.17% as Asian equities followed Wall Street lower. After European Central Bank ECB chief Christine Lagarde gave no fresh insight on the path for European interest rates at the annual forum, the euro rose 0.11% to $1.05315, after dipping to $1.05025 on Tuesday.

The ECB is expected to raise interest rates in July for the first time in a decade to try to reduce inflation, though economists are divided on the magnitude of the hike.

Lagarde and Fed Chair Jerome Powell will speak at the forum later on Wednesday.

Westpac strategists wrote in a client note, referring to the dollar index, which they believe will stick to a range of 101 to 105 for a long time to come. Recession risk will periodically undercut DXY but the broader mid-term uptrend likely persists a long time, according to Westpac strategists.

They said that the DXY is unlikely to peak until we are closer to the end of the Fed's front-loaded tightening cycle. The dollar fell 0.08% to 136.04 yen, while sterling rose 0.16% to $1.2204.

Despite the decline in equity, the risk-sensitive Australian and New Zealand dollar performed small rebounds from Tuesday's decline against the dollar, with the Aussie up 0.07% and the New Zealand dollar rising 0.18%.