* Graphics: World exchange rates in 2019 tmsnrt.rs/2egbfVh (Adds quotes, background, graphics)
By Saikat Chatterjee and Julien Ponthus
LONDON, May 13 (Reuters) – The dollar rose below a three-week high Wednesday as investors awaited a speech by Federal Reserve Chairman Jerome Powell after the U.S. President Donald Trump called for the imposition of negative interest rates.
Although some U.S. policy makers have spoken out against negative interest rate, two-year U.S. Treasury yields dropped to a record low of 0.105% last week, and 2021 Fed Fund futures contracts skirting negative territory.
Trump on Tuesday urged his country to “accept the gift” of negative rates – when data showed the U.S. Consumer prices fell 0.8% in April, the biggest fall since December 2008, when the economy was in a state of recession, prompting the debate on the political reaction.
“The central banker may be using the opportunity to siphon the negative interest rate talk in the bid,” wrote CMC Markets analyst David Madden, with many investors expecting a rebound in the dollar if Powell decides to do so.
Against a basket of rivals, the dollar index was flat at 100.02, hovering below the three-week high of 100.44 hit on Tuesday. Greenback has gained more than 5% from a low March low of 94.63.
“If push comes to shove, the Fed will naturally also consider negative interest rates, but they are likely to be at the bottom of the Fed’s list of potential options when it comes to further supporting the financial system or economy,” said Commerzbank strategist Antje Praefcke.
The euro fell 0.1% to $ 1.0840 against the dollar after industrial production in the euro zone had its steepest monthly decline on record in March, when coronavirus containment measures hit activity hard.
While the dollar has benefited from safe harbor flows in the midst of market turmoil, the outlook remains fragmented as hedge funds keep their short stakes on the currency while institutional investors remain bullish.
Powell will speak on a webcast hosted by the Peterson Institute for International Economics at 1 p.m. 9.00 (1300 GMT).
So far, Fed officials have said they don’t see a need to lower interest rates below zero, and some market players expect Powell to stick to this script.
“But what’s troubling is that Trump is talking about them now. Looking at past examples, the Fed has gradually done what Trump wanted quite often, ”said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.
Elsewhere, the British pound trimmed past gains to $ 1.2273 as bond yields plummeted after data showed the economy rising by a record 5.8% in March, though household spending fell less than feared by some market participants.
The Swedish krona was flat against the euro, falling 0.2% against the dollar after inflation slipped to its lowest pace for at least 30 years in April, according to analysts’ forecasts.
The New Zealand dollar fell 0.9% to $ 0.6018 against the U.S. after the central bank extended asset purchases to NZ $ 60bn from NZ $ 33bn, while its policy minutes said negative interest rates were a future option.
Reporting by Saikat Chatterjee and Julien Ponthus; More
reporting from Hideyuki Sano in Tokyo; Editing by David Goodman
and Alison Williams