The dollar remained mired near three-year lows on Monday after rebounding at the end of last week as resurgent US wage inflation data failed to quell scepticism among investors about the currency's outlook. A strong US jobs report on Friday showed wages growing at their fastest pace in more than eight years, leading to a rebound for the dollar and raising the possibility of more tightening by the Federal Reserve than markets had anticipated.
While stocks slumped on Monday and bond yields rose in response to the threat of quick policy tightening, analysts said the impact on the struggling dollar was not so clear, as the unwinding of dollar-funded carry trades clashed with growth in other parts of the world, especially Europe. Manuel Oliveri, an FX strategist at Credit Agricole, said the dollar was not behaving "straightforwardly", in part because real-money investors remained structurally underweight other regions.
With US interest rates expected to rise three times this year and the American economy growing at a healthy clip, fundamentals indicate a stronger dollar, analysts said. But the currency has failed to gain on economic news that points to tighter monetary policy. "In order to make the case for a sustainable upturn in the dollar, you need to see a real change in capital flows," Oliveri said, noting that data on those flows pointed to a stronger euro, which has gained 7.2 percent against the dollar since early November.
The dollar index against a basket of six major currencies stood little changed at 89.202 on Monday after gaining 0.6 percent on Friday. Latest positioning data showed net short positions swelled to $17.5 billion last week, just shy of a five-year high. Against the euro, the dollar hovered at $1.2455, against the three-year low of $1.2538 it reached last week. The euro was unmoved by a survey showing that euro zone businesses began 2018 by increasing activity faster than at any time in well over a decade as new orders surged.
The dollar struggled to hold on to gains against the yen, falling 0.4 percent to 109.74 yen after reaching 110.485 yen on Friday. The US currency remains higher than a four-month low of 108.280 yen reached on January 26. While analysts broadly expect the euro to gain against the dollar, some see the return of the greenback's sensitivity to domestic economic news. "Will the market really recognise the error of its ways - ie, the excessive dollar weakness - and correct it all of a sudden? That would be too good to be true," Commerzbank analysts said. "However, following the wake-up call of the labour market report, the market might at least focus more on US economic data again."
Worries about Britain's impending exit from the European Union rattled sterling investors, with the euro up 0.5 percent against the pound. The dollar was also up half a percent against the British currency. The Australian dollar rose to $0.7932 after touching $0.7891, its lowest in three weeks following a 1.5 percent decline on Friday. The Aussie had advanced to $0.8136 late in January, its highest in more than two years.
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