December 5, 2018 / 1:41 AM / 6 months ago

FOREX-U.S. Treasury yield curve inversion worries keep dollar under pressure

* Aussie slumps vs dollar after weak third-quarter growth

* Yen claws back some of the previous session’s losses vs dollar

* Graphic: World FX rates in 2018

By Daniel Leussink

TOKYO, Dec 5 (Reuters) - The dollar remained under pressure on Wednesday after the U.S. bond market sent worrisome signs about economic growth overnight, adding to fears that the Federal Reserve could put its rate-hike cycle on hold.

The Australian dollar slumped against the greenback on worse-than-expected quarterly economic growth, reversing the early gain booked after China’s Commerce Ministry said China and the United States would proactively push forward trade negotiations in the coming 90 days.

Investors remained nervous over an inversion of the yield curve between three-year and five-year U.S. Treasury notes and between two-year and five-year notes.

Analysts expected the two-year and 10-year yield curve, seen as foreshadowing a U.S. recession, to follow suit.

“In the initial phase of the inversion of the yield curve markets are worried about whether there’ll be a recession,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“They react more aggressively to weak data than to strong data,” Yamamoto said. “I think the dollar can be in correction-mode in a yield-curve inversion environment.”

Against a basket of six key rivals, the dollar edged up to 97.020. It was 0.7 percent off a 17-month peak of 97.693 touched on Nov. 12.

Interest rate hikes have sent short-dated yields higher, even as slowing economic growth expectations have kept longer-dated yields down.

The dollar fell last week after Fed Chairman Jerome Powell said last Wednesday that U.S. interest rates were nearing neutral levels, which markets interpreted as signalling a slowdown in rate hikes.

Against the yen, the dollar rose 0.1 percent to 112.91 yen, clawing back some of the previous session’s losses, when it booked its biggest one-day drop since July 20.

On Tuesday, the greenback shed 0.77 percent against the yen, which acts as a safe haven in times of geopolitical and financial turmoil as Japan is the world’s biggest creditor nation.

Still, as long as U.S. two-year yields do not fall substantially, the downside of the dollar against the yen remains limited, Mizuho’s Yamamoto said.

“While the Fed officials’ comments in the past days have been taken as dovish and the pricing of the rate hikes next year has been reduced, it doesn’t change the direction of the U.S. two-year yield, which is on the upside,” he said.

The euro edged down to $1.1335 after slipping 0.1 percent during the previous session.

The Australian dollar shed 0.4 percent to $0.7310 after Australia reported positive but lower-than-expected third-quarter economic growth.

The Aussie, often viewed as a barometer of Chinese growth, had risen earlier in the session after China’s Commerce Ministry said in a statement that a Chinese trade and economics delegation had held a successful meeting with the United States.

The Chinese ministry said the Chinese side would work to implement specific issues agreed upon as quickly as possible, and was confident they would be implemented.

U.S. stock and bond markets will be closed on Wednesday for a national day of mourning for former U.S. President George H.W. Bush, who died on Friday. (Reporting by Daniel Leussink, editing by Eric Meijer)

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