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Abu Dhabi, UAEMonday 17 December 2018

Dollar embattled even as US government reopens

Greenback’s index against a basket of major currencies stood at 90.36, not far off its three-year low

Federal Reserve chairman Janet Yellen. Joshua Roberts/Reuters
Federal Reserve chairman Janet Yellen. Joshua Roberts/Reuters

The dollar pared some of its losses after US senators struck a deal to lift a three-day government shutdown but it was mired near a three-year low against a basket of currencies on lingering concerns about its yield advantage being chipped away.

The US House of Representatives passed a short-term measure on Monday to fund the federal government through February 8 after it won enough support in the Senate.

Still, a boost from the deal did not last long partly because the measure secured funding for only a little more than two weeks, with the Republicans and Democrats still at loggerheads on many issues.

The dollar’s index against a basket of major currencies stood at 90.36, not far off its three-year low of 90.104 touched on January 17.

One reason often cited by traders for the dollar’s climbdown is that its relative yield attraction is at risk as the world’s major central banks are seen winding up their stimulus.

That would change the interest rate dynamics of the past few years, when the US Federal Reserve was the only central bank raising rates.

The dollar bounced back a tad to ¥110.90, after starting the week around ¥110.50, staying above its four-month trough of ¥110.19 touched on Wednesday.

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Read more:

US dollar weakness to continue due to political gridlock

Silver shaping up to outshine gold in the months ahead

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The yen gained earlier this month after the Bank of Japan (BOJ) trimmed its buying of long-dated government bonds, sparking speculation of an eventual exit from its large stimulus.

Still, many market players expect the BOJ to wait several months, and possibly many more, before tightening its policy, given the country’s inflation is nowhere near its two-percent target.

“I felt the market was trying to look for something that doesn’t exist,” said Bart Wakabayashi, Tokyo Branch manager of State Street Bank and Trust.

The euro stood at US$1.2263, consolidating its rally after having hit a three-year high of $1.2323 on January 17.

Expectations that the European Central Bank (ECB) may withdraw its stimulus gained momentum earlier this month after the accounts of its last policy meeting showed it could shift its policy communication early this year.

But sources have told Reuters the ECB is unlikely to ditch a pledge to keep buying bonds at its upcoming meeting on Thursday.

The British pound hit its post-Brexit referendum high of $1.3992, helped by optimism that Britain will reach a favourable divorce deal with the European Union.

French President Emmanuel Macron said on Saturday Britain would be able to have a bespoke deal with the European Union after Brexit, one of the UK prime minister Theresa May’s objectives.