15 October 2018

Dollar Gives Back Gains After 6 Month High

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What are currencies doing? 

The ICE U.S. Dollar Index DXY, +0.42% which measures the dollar against six rivals, most notably the euro, was little changed at 93.630, after earlier touching a high for 2018 and setting it up for the best finish since November 2017. The index gained 1.2% last week, its strongest weekly gain since the period ending April 27, according to FactSet.

The WSJ Dollar Index BUXX, +0.10% a broader measure of the greenback that also includes emerging-markets currencies, was little changed in negative territory at 87.14, after gaining 1% last week, also the biggest weekly gain since April 27.

The euro EURUSD, -0.6791%  edged 0.1% higher to $1.777, paring earlier losses.

Elsewhere, the British pound GBPUSD, -0.6105%  slid to $1.3420, compared with $1.3466 late Friday. Sterling is now trading at its lowest dollar level since late December.

Against the Japanese yen USDJPY, -0.78% the dollar surged to ¥111.04, from ¥110.75 late Friday.

The Turkish lira was taking a major hit against the dollar on Monday, hitting a fresh record low with the dollar buying 4.5792 lira USDTRY, -2.6515% compared with 4.4917 late Friday.

The Canadian dollar USDCAD, +0.2418%  and Mexico’s peso USDMXN, -0.8426% strengthened against the buck on Monday. Canada and Mexico remain in negotiations regarding the North American Free Trade Agreement with the U.S.

Market participants expect a deal in principle to be reached this month. President Trump’s economic adviser Larry Kudlow earlier said that Nafta was “still cooking” and that there could be more work done this week.

The greenback bought C$1.2801, down 0.7%, as well as 19.8625 lira, down 0.5%.

What’s driving currency trade? 

Optimism that the U.S. and China can avoid an all-out trade war drove several asset classes higher, including the dollar, global equities, U.S. stock futures and oil prices.

U.S. Treasury Secretary Steven Mnuchin said on Sunday that the Trump administration would put the trade war with China “on hold” while the two countries work on a deal to lower the U.S. trade deficit with that country. Meanwhile, China agreed to buy more U.S. products, but without specifying a dollar amount.

But investors will continue to watch the situation closely as trade representative Robert Lighthizer also released a statement that appeared to contradict Mnuchin saying U.S. officials may still resort to tariffs.

The dollar continued to draw support from elevated bond yields as higher rates can make dollars more attractive to investors. The 10-year Treasury yield TMUBMUSD10Y, -2.34%  was hovering at 3.064%, having touched a seven-year intraday high of 3.126% early Friday. 

Climbing rates have been supported by strong economic data, which have fueled the view that the Federal Reserve will adopt an aggressive pace of rate increases, perhaps three further rate increases rather than two in 2018.

The dollar was boosted as well against the euro in early Monday trading amid continuing tensions surrounding Italian politics. The country’s two biggest populist parties over the weekend agreed on an outline of their cabinet and are expected to present their prime minister candidate to President Sergio Mattarella later on Monday.

But having promised to challenge Brussels’ budget guidelines and rules on immigration, the coalition is already seen at loggerheads with the European Union. There are concerns the fiscal plans of the two parties involved will cause upheaval for the Italian economy and create a new sovereign debt crisis.

The yield on 10-year Italian government bonds TMBMKIT-10Y, +3.60%   rose 19 basis points to 2.412%, trading around its highest level since July last year.

Meanwhile in the U.K., the British pound slipped to its lowest level since December earlier in the day, as traders focus on Wednesday’s inflation print in Britain, as well as renewed Brexit negotiations which kick off in Brussels on Tuesday.

And the Turkish lira was at the mercy of markets on Monday, tumbling to a fresh record low. Last week, President Recep Tayyip Erdogan stoked worries about the independence of the central bank when he told Bloomberg News in an interview that he would become more involved in monetary policy after his expected re-election in a June 24 snap election.

There are also concerns about the Turkish central bank’s ability to stop the weakness of the lira, with a strong dollar not helping. The lira has tumbled 20% against the dollar this year.

What are strategists saying? 

“The China agreement is a big win for dollar, because if we look at the various uncertainties that the U.S. faces, trade was far and away the No. 1 question,” said Marshall Gittler, chief strategist at ACLS Global, in a note to clients.

“With the uncertainty in this policy area down somewhat, the dollar should be able to rally further, especially as uncertainty with regards to the key fiscal and monetary policy areas in Europe has risen in response to the Italian challenge,” he added.

“Sterling’s downbeat start to the new week suggests market participants are not too optimistic about the prospects of a breakthrough in Brexit talks ahead of the next round of negotiations with Brussels on Tuesday,” said Fawad Razaqzada, market analyst at Forex.com. “But with sentiment being extremely negative towards the pound, we think that the probability of it going significantly further lower without a meaningful bounce may be quite low now. Thus, a rebound here would not come as surprise to us, especially given the importance of this week from a fundamental point of view.”

What else is in focus? 

The Chicago national activity index for April rose to 0.34 in April, compared with 0.32 in March.

Atlanta Fed President Raphael Bostic said he would prefer to shift to a form of a flexible price-level target for the Fed during a speech at the Atlanta Economics Club.

Meanwhile Philadelphia Fed President Patrick Harker said he was seeing two or three more interest rate hikes by the central bank this year. The Fed raised rates in March and its dot plot shows three rate increases for 2018, making Harker’s expectation rather hawkish.

Minneapolis Fed President Neel Kashkari is scheduled to take part in a discussion at Michigan’s Bay College at 5:30 p.m.

In other assets, U.S. stocks, including the Dow Jones Industrial Average DJIA, +0.21% ended the session higher, amid the receding fears of international trade clashes.

Click here for the original article from Market Watch.

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