LONDON: The dollar consolidated three weeks of gains on Friday on expectations the European Central Bank and US Federal Reserve would increasingly diverge on monetary policy, although concerns US economic momentum may be peaking near-term capped gains.
Markets see the Fed raising interest rates at least three more times this year while expectations of policy tightening from the European Central Bank (ECB) and the Bank of England (BoE) have receded further, bolstering the dollar.
However, struggling equities and a rapid unwinding of longstanding short-dollar bets have offset that effect and may clip the dollar's near 4-percent gain over the past two weeks.
"Despite Treasury yields remaining in a range and the US economy performing well, the bull market in US equities is running out of momentum," Societe Generale currency strategist Kit Juckes said.
The sharp rise in the dollar in recent weeks - it broke above a 200-day moving average this week for the first time in a year - took hedge funds and investors by surprise. They had built up record short bets on the dollar and were forced to cover some of those positions, lifting the greenback even more.
Some, such as ING, said the dollar's momentum is also a reflection of large short bets against the greenback, built up by speculators in recent months. While short dollar bets have shrunk somewhat, they are still holding near a record $28 billion in late-April. For a related story, see
"The story in the last few days has been the disappointment over the ECB and the UK to start raising interest rates in the wake of the Fed and unless we see data picking up meaningfully, the dollar will outperform in the coming weeks," NAB senior markets strategist Gavin Friend said.
After a policy meeting this week, the Fed expressed its confidence on the outlook of the economy and appeared on track to raise interest rates by a further 75 basis points this year to a total of 1 percentage point in 2018.
In contrast, the ECB is not expected to raise interest rates until well into the second half of 2019, while bets on an interest rate hike from the BoE have withered away in the last two weeks after a recent run of tepid data.
MIND THE GAP
That pushed the gap between German and US government debt yields to its highest for nearly three decades on Friday and that gap could get even wider if monthly US payrolls data surprises on the upside.
Against a basket of its peers, the dollar rose 0.1 percent at 92.51. It hit a 2018 high of 92.83 on Wednesday.
Friday's employment report for April will be evaluated for further indications of the strength in the US labour market and inflation pressures.
"Any slowdown in the pace of wage growth should re-energise dollar bears," Maybank senior FX strategist Christopher Wong said in a note.
Key support for the dollar index lies at its 200-day moving average, which is now near 92, Wong said.
Nonfarm payrolls probably increased by 192,000 jobs last month, according to a Reuters survey of economists. Payrolls rose by 103,000 positions in March, the smallest gain for six months, which economists dismissed as payback after unseasonably mild weather boosted hiring in February.
The euro edged lower to $1.1970, staying above a near four-month low of $1.1938 set on Wednesday.
The currency had risen 0.3 percent on Thursday, shrugging off data showing an unexpected slowdown in euro zone inflation, as the dollar's recent rally paused.
The Australian dollar bounced modestly as speculators took profits on long US dollar positions. The Aussie rose 0.2 percent to $0.7549 AUD=D3, pulling away from an 11-month low near $0.7472 set this week.
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