Dol­lar in­dex sinks to­wards 100 level

An­a­lysts trim fore­casts af­ter Fed’s ‘dovish hike’ as leg­isla­tive con­cerns rise

Financial Times Middle East - - Markets & Investing - ROGER BLITZ

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.

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