The dollar rose on Wednesday to its highest levels in over a year as the Turkish lira crisis continued to trouble emerging markets feeding demand for the greenback as a safe-haven asset. Signs the US economy remains robust ahead of an expected interest rate hike by the Federal Reserve next month have helped the dollar outperform other currencies recently.
So has a plunge in the lira which has hurt the euro because of European banks' exposure to Turkey and driven demand for the dollar and other currencies such as the Swiss franc and the Japanese yen as safe-havens. The dollar index that tracks the greenback against six currencies, rose above 96.9 for the first time since late June 2017.
"US rates continue on an upward path ... That does provide fundamental support to the dollar in the medium term. We see scope for that move to continue," said Sunil Krishnan, head of multi-asset funds at Aviva Investors whose team helps to run assets of ?108 billion. Turkey on Wednesday doubled tariffs on some US imports including alcohol, cars and tobacco in retaliation for US moves, but the lira rallied further.
The lira has lost more than 40 percent of its value against the dollar this year, hit by worries over President Tayyip Erdogan's calls for lower interest rates and his fraying ties with the United States. On Wednesday, it recovered some ground to trade briefly at 5.7503 to the US dollar, before falling back to 6.1700 at GMT 11:05. The rebound to below 6.0 against the dollar was driven by a banking watchdog step to limit swap transactions and by hopes of improved EU relations.
Turkey's finance minister will also seek to reassure international investors in a conference call on Thursday. Markets are concerned by Erdogan's influence over the economy and his resistance to interest rate increases to tackle double-digit inflation. The rally in the dollar prompted selling in both the euro and the British pound.
The single currency drifted down toward $1.13 for the first time since July 2017 and sterling dipped below $1.27 for the first time since June last year. The euro is under pressure because of the impact of the Turkish lira collapse on euro zone banks with exposure to Turkey and due to concerns about a fiscal spending spree by the Italian government which is involved in a standoff with Brussels. Some investors are worried that the market turbulence caused by Turkey's economic meltdown might delay the ECB's monetary normalisation timetable, said Commerzbank FX analyst Esther Maria Reichelt.
"The attractive rate advantage of US bonds is strengthening demand for the dollar. Combined with doubts over the normalisation efforts of the European Central Bank this limits the upside potential in EUR-USD for now," said Reichelt. The plunge in the lira has prompted capital outflows from other emerging markets that run hefty current account deficits and rely on foreign capital.
Emerging market currencies continued to reel on Wednesday with the South African rand down 2.5 percent, the Russian rouble down one percent RUB= and the Mexican peso 0.8 percent. Against the yen, the dollar edged down about 0.1 percent to about 111.165 yen. The pound hit a 13-month low, dropping 0.2 percent to $1.2694 despite data showing Britain's inflation rate picked up in July for the first time this year.
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