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Dollar Doldrums: USD Suffers Worst Day in 10-Months Despite Pick-Up in Core Inflation

The U.S. Dollar Index (DXY) suffered its worst one-day decline in ten months on Friday in spite of an unexpected acceleration in the rate of core inflation and what appeared to be an upward revision to U.S. interest rate expectations.

After the Bureau of Labor Statistics announced that U.S. consumer prices, excluding food and energy, climbed 0.3 percent in December, the yield on two-year Treasury notes touched 2 percent for the first time since the height of 2008’s financial crisis, appearing to solidify market expectations for a number of rate hikes by the Federal Reserve in 2018.

Ordinarily, such news would have been dollar-supportive, but not this time. The Dollar Index fell through 91 for the first time in three years, settling at 90.9, and in doing so, locked in a fourth consecutive weekly loss.

At present, investors are taking every opportunity to sell the dollar, says senior currency strategist at Daily FX, Ilya Spivak, favouring instead to “chase opportunities to get in early [on other currencies] as other top central banks begin to dial back accommodation.”

Indeed, it’s been a rocky start to 2018 for the dollar. The Dollar Index’s 1.5 percent decline in the first two weeks of the year adds to a 9.7 percent decline for 2017, which itself was the index’s worst annual performance since 2003.

“The rush to capture would-be policy pivots from the BOJ and the ECB was clearly on display this week,” Spivak said in reference to the euro’s surge to a three-year high above $1.22 and the yen’s sharp appreciation to rates below ¥111 per dollar.

Dollar traders have now switched focus from “Trumpflation” – which prompted dollar euphoria in the aftermath of 2016’s U.S. presidential election and, to a lesser extent, fuelled September and October’s rally – to global reflation.

With the Fed now more than two-years into its policy tightening cycle, it stands to reason that interest rates in the rest-of-the-world’s advanced economies have more upside in the coming years than those in the U.S. – reason enough to buy everything non-dollar, or so it seems.

The dollar wasn’t helped on Friday by positive news from Europe.

News that Angela Merkel’s Christian Democratic Union party, together with its sister party, the Christian Social Union, had achieved a breakthrough in coalition talks with the Social Democrats made investors feel better about wading into euros. The euro gained nearly 1.5 percent against the dollar on the day, to $1.2203.

Likewise, sterling bulls were given the freedom to add to long positions after news broke that the Netherlands and Spain had agreed to seek a Brexit deal that would keep Britain as close to the EU as possible. A 1.5 percent gain took the pound to $1.3727 – a nineteen-month high.

The dollar also suffered against the Brazilian real, Mexican peso, Canadian dollar, Malaysian ringgit and Norwegian krone, among others, in response to an unrelenting rally in the price of oil. NYMEX WTI crude oil futures rose for a fifth consecutive week to a three-year high of $64.4 per barrel.

Of the aforementioned “petro-currencies,” the Norwegian krone did best of all. With oil and gas products making up nearly half of Norway’s total exports, the krone is highly sensitive to gyrations in these commodities’ prices. A 1.3 percent appreciation to Kr.7.908 per dollar marked the krone’s strongest level in thirteen weeks and the currency’s best one-day gain since May.

In the Asia-Pacific region, currencies weakened against the politically-driven strength of the euro and British pound but of course continued their march against the dollar.

The remarkable Malaysian ringgit gained for an eleventh consecutive week against the greenback and signalled its comfort at stronger levels by closing at rates below RM 4 per dollar for the second consecutive week – now 3.97.

Other regulars on BestExchangeRates – the Thai baht, Singapore dollar, South Korean won and Chinese yuan – all moved to new long-term highs.

 

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