Dollar gains on resilient U.S. economy, flight to safety

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo. REUTERS/Yuriko Nakao

By Herbert Lash and Alun John

NEW YORK/LONDON (Reuters) – The dollar hit a fresh two-month high against a basket of peers on Wednesday as a resilient U.S. economy helped to bolster the currency, while unease over debt ceiling talks in Washington kept investor flows moving to safe havens.

The impasse in Washington over debt ceiling negotiations has helped to lift the dollar, even though it could lead to a default and push the U.S. economy into recession as investors fear it might spell worse trouble for the global economic outlook.

Central bank policy divergence has been a popular theme among FX investors this year, with a recent outlook suggesting the Federal Reserve would start cutting rates soon, said Joe Manimbo, senior market analyst at Convera in Washington.

READ MORE: Dollar edges up as markets await debt-ceiling talks, inflation data

“If you consider global data of late, it’s painting a more resilient picture of the U.S. economy than what’s going on in Europe,” he said. “That could allow the dollar to maintain its yield advantage for longer,” Manimbo said.

Federal funds futures show a 28.6% probability the Fed raises rates when a two-day policy meeting ends on June 14, according to CME Group’s FedWatch tool.

The dollar index, which tracks the U.S. currency against six major peers, hit 103.91, its highest since March 20. The index last rose 0.299% at 103.83.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said he doubts the debt ceiling negotiations have been a big factor in the foreign exchange market.

“The U.S. dollar has been rallying more or less for three weeks helped by stronger-than-expected data and rising U.S. interest rates,” he said.

Economic data could continue to support the dollar, as the Atlanta Federal Reserve Bank projects the U.S. economy is growing at a 2.9% clip in the second quarter, Chandler said.

READ MORE: South African rand steady as markets cautious ahead of US CPI print

“My sense would be that we don’t get an agreement until the very last minute anyway, which means not Memorial Day, but sometime early next week,” he said.

The pound dropped to a one-month low against the dollar of $1.23645 and was last just above that, down 0.19%, after data showed British inflation slowed by much less than markets had been expecting.

The British currency lost ground against the euro too, which was last down 0.25% at 1.1492.

Core eurozone services inflation reported on Tuesday remained elevated, hurting Sweden’s crown, as the European Central Bank is poised to raise interest rates in June and July.

The Swedish currency hit 11.541 crowns per euro, its weakest against the common currency since March 2009.

New Zealand’s dollar, meanwhile, slipped after the central bank signalled it was done tightening after raising rates by 25 basis points to the highest in more than 14 years.

READ MORE: Global shares drop, benchmark US yields ease amid debt ceiling deadlock

The dollar strengthened 0.82% against the crown, while the New Zealand dollar slid 2.29% against the U.S. currency to 0.61050.

Higher inflation, leading to higher for longer Bank of England rates, had supported the pound in recent months but that relationship is now starting to reverse.

“We’re now in that realm where if the Bank of England does meet market expectations and take interest rates that high, we’re talking about a worsening of the UK investment outlook, and financial stability considerations coming into view, which is negative for UK assets,” said Simon Harvey, head of FX analysis at Monex Europe.

Currency bid prices at 12:59 p.m. (1659 GMT)

       Description      RIC         Last       U.S. Close  Pct Change     YTD Pct       High Bid    Low Bid          

                                               Previous                   Change                              


       Dollar index                 103.8300   103.5400    +0.30%         0.329%        +103.9100   +103.3400          

       Euro/Dollar                  $1.0756    $1.0771     -0.14%         +0.38%        +$1.0801    +$1.0748          

       Dollar/Yen                   139.3000   138.5950    +0.51%         +6.25%        +139.3800   +138.2350          

       Euro/Yen                     149.84     149.25      +0.40%         +6.80%        +149.9000   +148.8500          

       Dollar/Swiss                 0.9059     0.9016      +0.47%         -2.03%        +0.9066     +0.9005          

       Sterling/Dollar              $1.2371    $1.2416     -0.36%         +2.29%        +$1.2469    +$1.2358          

       Dollar/Canadian              1.3593     1.3503      +0.67%         +0.32%        +1.3602     +1.3497          

       Aussie/Dollar                $0.6537    $0.6611     -1.10%         -4.09%        +$0.6615    +$0.6530          

       Euro/Swiss                   0.9743     0.9706      +0.38%         -1.54%        +0.9751     +0.9705          

       Euro/Sterling                0.8692     0.8676      +0.18%         -1.72%        +0.8710     +0.8650          

       NZ                           $0.6104    $0.6248     -2.30%         -3.86%        +$0.6256    +$0.6094          


       Dollar/Norway                10.9730    10.9450     +0.30%         +11.86%       +11.0010    +10.9370          

       Euro/Norway                  11.8020    11.7949     +0.06%         +12.52%       +11.8480    +11.7743          

       Dollar/Sweden                10.7207    10.6145     +0.77%         +3.00%        +10.7309    +10.6023          

       Euro/Sweden                  11.5271    11.4392     +0.77%         +3.43%        +11.5444    +11.4354          

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