Foreign exchange market

US dollar charges to 14-year top on Trump bets, but pullback in the cards

PUBLISHED : Thursday, 17 November, 2016, 1:05am
UPDATED : Thursday, 17 November, 2016, 1:05am

The dollar climbed to a near 14-year high against a basket of currencies on Wednesday, even

as analysts cautioned the greenback is vulnerable to a letdown from its surge tied to bets on pro-growth policies under US President-elect Donald Trump.

The euro deteriorated to its weakest level in almost a year against the greenback. Trump’s stunning victory on November 8 has raised concerns about a rising tide of potentially destabilising wins for populist candidates and issues on ballots across Europe in the coming year.

“The market has gone a bit too far ahead of itself. It looks vulnerable for a short-term pullback,” said Mazen Issa, senior currency strategist at TD Securities in New York.

Weaker-than-forecast data on US producer prices and industrial production on Wednesday pinned Treasury yields near their 10-month peaks and put a cap on the dollar.

The dollar index reached 100.57, which was its highest since April 2003 before retreating to 100.46, up 0.2 per cent on the day. It has risen 3.5 per cent over eight days, which would be the biggest such increase since May 2015.

While traders have increased their expectations on the Federal Reserve raising interest rates at its December 13-14 policy meeting, the dollar rally may cause Fed policy-makers to reconsider such a move because of its repercussions on US exports, analysts said.

On Thursday, Fed Chair Janet Yellen will testify before the Congress’ Joint Economic Committee at 10 a.m. EST (1500 GMT) where she might raise concerns about the dollar’s surge.

“Anything (Yellen says) that expresses caution won’t be taken lightly by markets,” Issa said.

Chinese yuan touches lowest level in eight years

U.S. interest rates futures implied traders saw about a 91 per cent chance the Fed would raise the target range on policy rates to 0.50-0.75 per cent next month, CME Group’s FedWatch showed.

Pressured by traders’ conviction on a US rate hike and political worries about Europe, the euro fell below $1.07 for the first time since the start of December 2015.

The dollar gained 0.3 per cent to 109.48 yen after rising to 109.75 yen, its highest since June 1.

“Under Trump, we are looking at fiscal policy divergence (with Europe and Japan) which should be very positive for the dollar. Protectionism is a risk, but if that is focused on emerging markets, it may perversely also be a dollar positive,” said Adnan Akant, head of foreign exchange at Fischer Francis

Trees and Watts, a New York-based institutional currency manager owned by BNP Paribas.