The dollar consolidated losses against a basket of currencies on Monday as US bond yields rose but traders were cautious on the broader outlook as recent strong data has not changed expectations about the path of US interest rates. Data on Friday showed U.S economic growth accelerated to 2.3 percent in 2017, faster than the 1.5 percent logged in 2016, although growth in the December quarter slowed on a sequential basis and was below market expectations.
Lee Hardman, a currency strategist at MUFG, said the strong data should encourage the Fed to adopt a more confident tone in this week's policy meeting and will only cement expectations of another rate hike in March. But "the updated signal is unlikely to prove sufficient to prompt the market to price in more rapid tightening beyond the Fed's current plans for three hikes this year, thereby dampening support for the US dollar", he added.
Treasury Secretary Steven Mnuchin gave US currency bears a major boost last week with a tacit endorsement of a weak dollar. While US President Donald Trump, who has advocated a strong dollar, tried to row back from those comments, the damage had already been done and the greenback's downturn since November showed little sign of abating. Against a basket of currencies, the dollar bounced a quarter of a percent higher to 89.30 after scoring six consecutive weeks of losses. On a monthly basis it is set to fall 3 percent.
Over the last decade, including the global financial crisis in 2008, it has fallen by that extent only 10 times, according to Thomson Reuters data. Reuters data points to market expectations of about three more Federal Reserve rate hikes this year, starting in March, although some analysts, including at Goldman Sachs and JP Morgan Asset Management expect the Fed to raise four times.
US Treasury yields climbed to fresh multi-year highs in European trade on Monday, extending rises seen last week as investors braced for major central banks to step back from ultra-easy monetary policies. The 10-year yield rose to 2.71 percent, its highest since early 2014. The Swiss franc was the day's underperformer, declining more than a quarter of a percent against the dollar and weaker against the crosses after weekly deposits data showed a pick up in capital outflows.
The franc has traditionally been a countercyclical currency for global funds as it tends to gain when risk aversion is on the rise and vice versa, although that correlation has weakened thanks to central banks' unconventional monetary policies. But as the European Central Bank starts to unwind its multi-year policy stimulus starting this month, market watchers expect the Swiss currency to weaken substantially as domestic investors look to international markets for better returns.
"We expect the SNB (Swiss National Bank) to lag the other European central banks in normalizing monetary policy as the exchange rate remains highly overvalued and as outflows from the Swiss market have picked up pace. That should be a relief for the SNB," said Kamal Sharma, a director of G10 FX strategy at Bank of America Merrill Lynch.
While the franc edged 0.3 percent weaker against a broadly struggling dollar, it was also on the back foot against the euro, with the currency stabilising above the 1.16 line. UBS Wealth Management expects the franc to weaken to 1.19 against the euro as the gap between ECB policy withdrawal and SNB's precautionary stance is likely to widen. Chairman Thomas Jordan reaffirmed the SNB's view on the currency earlier this month, saying the Swiss franc remained "highly valued" and negative interest rates were still needed.
The euro traded at $1.2400, down 0.2 percent and off a three-year peak of $1.2538 touched on Thursday. The single currency's failure over the past couple of days to stay above $1.25 is seen by some traders as a sign of fatigue in its six-week old rally. Data from US financial watchdog the Commodity Futures Trading Commission showed speculators' net long position in the euro/dollar futures traded in Chicago rose to a record high, suggesting that profit-taking could be on the cards.