Dol­lar sur­prises strate­gists with sud­den weak­e­ness

Financial Chronicle - - FUNDAMENTALS, POLITICS - VATSAL SRI­VAS­TAVA

THE US dol­lar, usu­ally seen as a safe haven in tur­bu­lent times, sur­prised some cur­rency strate­gists on Thurs­day by los­ing ground af­ter spooked in­vestors drove US stocks to their worst fall in nearly eight months.

The VIX, Wall Street’s “fear in­dex” mea­sur­ing the stock mar­ket’s ex­pec­ta­tion of volatil­ity, rose by 44 per cent to 22.96 on Thurs­day, its high­est level since April.

The dol­lar in­dex, a gauge of its value against six ma­jor cur­ren­cies, fell 0.31 per cent to 95.21 on Thurs­day, af­ter hit­ting a high of 95.79 in the pre­vi­ous ses­sion.

“In an en­vi­ron­ment where peo­ple are con­cerned about ris­ing volatil­ity, the dol­lar tends to do well - es­pe­cially ver­sus higher-risk cur­ren­cies such as the Aussie and Cana­dian dol­lar,” said Stu­art Rit­son, head of Asian rates & for­eign ex­change at Aviva In­vestors.

“There seems to be a dis­con­nect and there is no ob­vi­ous ex­pla­na­tion for why the dol­lar did not fare bet­ter on a risk-off day,” said Ray At­trill, head of for­eign ex­change strat­egy at NAB.

“The yen con­tin­ues to show its colours as the mar­kets favourite risk haven proxy,” added At­trill.

The safe-haven yen strength­ened to 112.13 against the dol­lar, its high­est level this month, tak­ing heart from risk aver­sion in the wake of warn­ings from the IMF over global growth and fi­nan­cial sta­bil­ity.

“There was a clear bid for cur­rent-ac­count sur­plus coun­tries with both the JPY and EUR find­ing sup­port,” ANZ said in a note.

The US Fed­eral Re­serve’s ap­par­ent de­ter­mi­na­tion to raise in­ter­est rates over the next 12 months has driven up US Trea­sury yields, which have been fur­ther bol­stered by strong eco­nomic data.

“We ex­pect ris­ing in­fla­tion to keep the Fed hik­ing in­ter­est rates at its cur­rent once-a-quar­ter pace un­til the mid­dle of 2019,” Cap­i­tal Eco­nom­ics said in a note.

Ex­pec­ta­tions of hawk­ish rate rises may have been at work on Wed­nes­day when sell­ers sent the Nas­daq to close at 7044.49, its low­est level since early July.

The S&P 500 and Dow Jones In­dus­trial Aver­age weren’t too far be­hind, both fall­ing more than 3 per cent.

Bench­mark 10-year yields cooled off from a seven-year high of 3.261 per cent hit on Tues­day to 3.1516 per cent.

The euro rose 0.35 per cent to 1.1566 on Thurs­day af­ter hit­ting a low of 1.1477 in the pre­vi­ous ses­sion.

EU Brexit ne­go­tia­tor Michel Barnier said on Wed­nes­day the par­ties had agreed on much of the with­drawal agree­ment ahead of a sum­mit of the bloc’s 28 na­tional lead­ers next week.

But the euro’s gains are likely to be lim­ited with mar­kets wor­ried about the sus­tain­abil­ity of Italy’s pub­lic fi­nances, de­spite Ital­ian econ­omy min­is­ter Gio­vanni Tria stat­ing that the gov­ern­ment would do every­thing in its power to re­gain the con­fi­dence of fi­nan­cial mar­kets.

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