The euro climbed to a fresh 2-1/2 year high against the dollar on Wednesday as investors added long bets in the single currency though some analysts advised caution as some signals such as interest rate differentials were flashing a warning sign. While fears of a trade spat between China and the US saw the US currency score some early gains against its commodity-linked rivals such as the New Zealand and the Canadian dollar, it has struggled against the euro. The euro briefly climbed to $1.1869, its highest since January 2015 before giving back some gains to trade 0.3 percent up at $1.1835 on the day.
"We see some dollar recovery in the fourth quarter as market expectations are rock bottom now so it might not take much to see some improvement," said Derek Halpenny, European head of FX research, Bank of Tokyo-Mitsubishi UFJ. The dollar's weakness this year has been fuelled by a steady unwinding of expectations of optimism about US President Donald Trump's stimulus plans and falling hopes to the extent of a Federal Reserve policy increase in the coming months.
For example, expectations of a US rate increase at its September meeting has all but evaporated from the market compared to a 20 percent probability a month earlier, according to CME's Fedwatch tool. But recent data has been encouraging. Last week's data showed the US economy accelerated in the second quarter with market expectations focused on jobs data this week.
Interest rate differentials are also pointing to a reversal in the dollar weakness trade. Two-year US bond yields are now yielding 200 basis points more than their German counterparts, seven basis points more from a month ago. The dollar index against a basket of major currencies was broadly flat at 92.96. On Tuesday, it hit its lowest level in 15 months at 92.777.
In contrast to the political risks and monetary policy uncertainty that have plagued the dollar, the common currency has drawn support from expectations that the European Central Bank would eventually begin phasing out its easy policy. While the euro has been a star among its G10 peers this year, gaining more than 12 percent against the dollar with most of its gains coming in the last three months, some investors are growing cautious about the single currency's strength.
"Our European strategists advise selling the euro on rallies as they believe the ECB hawkish expectations priced into the market may be premature," said Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong.
Copyright Reuters, 2017
Dollar extends modest bounce from 15-month lows in Asia
TOKYO: The dollar extended its modest bounce from 15-month lows on Wednesday, benefiting from a pause in selling of the battered currency as investors begin positioning for key events this week, notably Friday's US employment report. The dollar index against a basket of major currencies shook off a decline in Treasury yields and was a shade higher at 93.090 after bouncing from 92.777, its lowest since May 2016. The euro was unchanged at $1.1806 after being nudged away from a 2-1/2-year peak of $1.1846 set the previous day.
The greenback has been weighed down by political turmoil gripping Washington and largely uninspiring US economic data, particularly sluggish inflation, which is adding to uncertainty about the pace of future Federal Reserve policy tightening. "The dollar has already weakened significantly, especially against its European counterpart, reaching a point where some participants began buying back the currency ahead of Friday's US employment data," said Shin Kadota, senior strategist at Barclays in Tokyo.
"But these are mere position adjustments before the US jobs data and the bearish trend for the dollar still remains intact," Kadota added. The euro has gained about 12 percent against the dollar so far this year. In addition to the political risks and monetary policy uncertainty that have plagued its US peer, the common currency has drawn support from expectations that the European Central Bank would eventually begin phasing out its easy policy.
The US currency was 0.15 percent higher at 110.535 yen, pulling away from a near seven-week low of 109.920 touched overnight. "The dollar is being supported against the yen with US stocks continuing to perform strongly, despite the potential risks they are faced with," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust. The Dow racked up a fifth straight record high on Tuesday, even as Wall Street loses confidence that President Donald Trump and a Republican-controlled Congress will be able to push through tax cuts and increased spending on infrastructure this year.
Sera at Sumitomo Mitsui Trust also said that the market is likely to take in stride a cabinet reshuffle planned on Thursday by Japanese Prime Minister Shinzo Abe, who hopes to revive his flagging ratings. "Market participants of course will be watching how the cabinet reshuffle turns out. But few, if any, expect the reshuffle to have an impact on the market," Sera said. For potential impact on the dollar, the market awaited the US ADP jobs report and comments by San Francisco Fed President John Williams and Cleveland Fed chief Loretta Mester due later in the session. The greenback, meanwhile, managed to bounce back against dollar bloc currencies such as the New Zealand and Canadian dollars.
The New Zealand dollar dropped to a one-week low of $0.7416 and was last down 0.5 percent at $0.7427 following lacklustre data. The number of jobs created in New Zealand fell unexpectedly and wage inflation remaining tepid in the second quarter, adding weight to the prospect of the central bank keeping rates on hold at record lows for years.
The Canadian dollar struggled after being hit by a slide in crude oil prices. The loonie extended its overnight drop to trade at C$1.2570 per dollar, pulled further away from a 25-month high of C$1.2414 reached last week. The Australian dollar, another commodity-linked currency, was down 0.2 percent at $0.7953 following its ascent the previous day to $0.8066, its strongest since May 2015.
Copyright Reuters, 2017