Dollar pressured by falling United States yields; recession fears

US dollar falls on economic growth fears

Global stocks dive on growth concerns, doubts over trade truce

Short-term rates traditionally move in tandem with changes in the Federal Reserve's overnight lending rate, the Federal funds rate.

Giddis added that with all eyes on inflation, the Labor Department's report on the employment situation on Friday will be key for Fed officials.

"The U.S. economy is likely to be able to withstand another rate hike or two, therefore, the flattening of the Treasury curve looks a little over done". It may take two rate hikes or more for that portion of the curve to invert.

- CNBC's Sam Meredith and Ryan Browne contributed to this article.

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the USA yield curve in bond markets.

Spot gold eased 0.4 percent to $1,236.11 an ounce after touching its highest level since October 26 at $1,241.86 an ounce on Tuesday. The spread between the two dropped to negative 0.01 percentage point on December 3, the first time that has happened since 2007. This has spooked some people, because an inversion in the yield curve is sometimes regarded as the harbinger of a recession.

In fact, one section of the yield curve has already inverted: between 3-year and 5-year notes.

That message, of a Fed committed to a strategy that would not be shaped by short-term data, was echoed this week by Fed vice chair Randal Quarles.

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Whatever the situation with the Fed and the USA markets, emerging markets may be effected even more than the US economy.

Williams said the USA central bank should expect to continue raising interest rates "over the next year or so" even while it pays close attention to possible risks highlighted by financial markets.

Though it is not certain the narrowing in spreads is related to doubts about economic growth, alternate explanations would not necessarily be helpful to the Fed either.

Recent news has contributed to flattening the curve, including a speech on November 28 by Fed chair Jerome Powell interpreted by many as signaling a U.S. slowdown.

The closely watched spread between two-year and 10-year bonds dipped below 0.1 percentage point on Tuesday, the lowest since before the last recession and continuing a slide that began in October. On Monday of this week, the US government's five-year bond yielded less interest than the three-year bond. However, when investors expect interest rates to decline in the future - typically because of a weak economy - they scramble to lock in today's comparatively high interest rates for as long as possible.

"If that is indeed to be the case, the recent strong equity recovery is at risk from fundamental economic deterioration, a message that is sounding from the junk bond market, whose rebound has been far less impressive".

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

The Fed has blown three major bubbles in 18 years.

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