Dollar index sinks towards 100 level
Analysts trim forecasts after Fed’s ‘dovish hike’ as legislative concerns rise
The US dollar is being hit by investor reaction to the Federal Reserve’s measured policy tone and concerns over the Trump administration’s protectionist trajectory and the legislative obstacles it is likely to face.
Although the index measuring the dollar against a basket of its peers was broadly flat yesterday, analysts were downbeat about its prospects of recovering momentum. It gained 8 per cent in the fourth quarter last year.
Investors interpreted last week’s interest rate rise as a “dovish hike” in view of the Fed’s caution on the path of further tightening this year. The dollar index has fallen 1.4 per cent since the central bank meeting last Wednesday and is heading towards the 100 level.
JP Morgan described the dollar as “listless”, while Citigroup dropped its prediction of euro-dollar parity at the end of the year. Marc Chandler at Brown Brothers Harriman said the prospect of other central banks raising rates was spur ring dollar losses.
Data ahead of the meeting showed a retreat in dollar long positions, while there was a sharp pullback in selling the euro following a European Central Bank meeting that was interpreted as a tilt towards hawkishness.
The dollar index hit 99.23 last month. “If the 100 level is breached now, a return to the early February low looks more likely ,” Mr Chandler said.
Dollar weakness has benefited emerging markets currencies, notably the South African rand, which has rallied 4 per cent since last Wednesday and reached levels last touched in mid2015. The South Korean won rose 1 per cent to its highest level against the dollar for five months.
Analysts said the dollar’s weaker tone also reflected the absence of a clause on combating trade protectionism in the communiqué of the G 20 finance ministers’ meeting at the weekend.
“We are closer to a currency war than we have been for a long time,” said Ulrich Leuchtmann of Commerzbank.
However, the G20 reaffirmed the need for countries to refrain from competitive devaluations and again committed its members not to target exchange rates for such purposes.
“Washington remains cautious over changing the rhetoric on FX,” said Derek Halpenny of Mitsubishi UFJ Financial Group.
Steven Englander, Citi’s head of forex strategy, warned that the dollar would head lower if the House vote on repealing Obamacare on Thursday was defeated, because that would augur ill for the Trump tax reform agenda.
“Bottom line: if it goes down in smoke it will probably take the US dollar down with it,” Mr Englander said. “As the odds of any significant legislative action fall, the dollar could hit the lows of the year against both majors and minors.”
JPMorgan said the dollar’s direction was likely to be increasingly influenced by non-US factors, including European data and political risk. There was a growing sense that the buck was “losing its centrality . . . having dominated the FX narrative for many months postelection”, the bank’s analysts added.