Investors bet on long-term dollar strength after Fed comments; greenback rises

LONDON - 19 July 2018: The dollar rose on Thursday after upbeat comments on the U.S. economy by the Federal Reserve’s chairman reinforced expectations by investors of the currency’s long-term strength.

Jerome Powell did not alter expectations of U.S. monetary policy in his addresses to Congress on Tuesday and Wednesday, but traders saw his remarks as signifying that authorities were comfortable with the dollar’s near 6 percent rise against its rivals in the last three months.

That represents a shift in the stance laid out by Treasury Secretary Steven Mnuchin, who in highly unusual remarks in January said a lower dollar was “good for us”.

A weaker dollar would help American exporters compete abroad but it may undermine its status as the world’s top reserve currency.

On Wednesday, Powell said he believed the United States was on course for years more of steady growth, and carefully played down the risks to the U.S. economy of an escalating trade conflict.

The dollar index versus a basket of six major currencies on Thursday rose 0.3 percent to 95.344, nearing a 12-month high of 95.531 scaled on June 28.

The euro was down 0.3 percent at $1.1610. It brushed a 16-day low on Wednesday of $1.1602.

Meanwhile, the widening trade rift between China and the United States knocked the yuan to a one-year low in both the onshore and offshore markets.

“The Fed Chair does not appear to be overly concerned about the flatter yield curve and the central bank is signalling further interest rate increases. We see limited potential for a near-term turnaround in dollar strength,” said Chris Turner, head of currency strategy at ING in London.

Though concerns remain the U.S. economy may be nearing a peak as evident from a flattening yield curve, the widening rate differentials between the United States and other major markets have lifted the dollar.

The two-year Treasury yield stood near 2.624 percent, its highest since August 2008 scaled on Wednesday.

“With the Fed poised to hike further, currency market focus is shifting back towards the spread between the U.S. two-year yield — which is now well over 2 percent — and those of other countries, like Japan,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.

The Fed has been ahead of its peers in tightening monetary policy and is expected to have raised rates a total of four times in 2018 to tackle rising inflationary pressures.

With U.S. rates continuing to rise and most other major central banks taking only tentative steps towards monetary normalization, many analysts expect more dollar upside. RBC is forecasting a year-end euro/dollar of $1.12.

Against the Japanese yen, the dollar was down 0.1 percent at 112.925 yen. The dollar on Wednesday rallied to as high as 113.14 against the yen, its strongest since January 9.

TARIFFS

China’s Ministry of Commerce said on Wednesday it would have to take further measures to compensate for losses caused by U.S. tariffs on steel and aluminium

U.S. President Donald Trump’s top economic advisor, Larry Kudlow, also said on Wednesday that he believed Chinese President Xi Jinping has blocked progress on a deal to end duelling U.S. and Chinese tariffs.

Amid the simmering trade tensions, the Chinese yuan extended losses to touch a one-year low of 6.779 per dollar in offshore trading.

The Australian dollar gained on a stronger-than-expected local June employment data.

Sterling remained frail, hit the previous day by weak inflation data. Ongoing political turmoil related to Britain’s plans to leave the European Union has also served as a lingering drag on the pound.

The pound traded at $1.3023, after hitting a 10-month low of $1.3010 on Wednesday.