It was a disappointing end to the week for the US dollar but enough was achieved between Monday and Thursday for it to record its best week since bubbling over in the aftermath of Donald Trump’s election in November 2016. Investors piled into dollars as yields rose amid a massive increase in the supply of US government debt.
Against a basket of currencies, the dollar has finally broken cleanly from the area of congestion formed during February, March and previously in April. The Dollar Index, which began the week on its lows at 90.26, settled on Friday at a fifteen-week high of 91.53, although prior to a bout of profit-taking in the week’s final hours, it had traded as high as 92.0.
Fuelling the dollar’s rise has been US yields. The yield on the benchmark 10-year Treasury averaged 2.99 percent last week but, importantly, midweek, this breached 3 percent for the first time in more than four years – a yield high of 3.04 percent. At its lowest points in 2017 and 2016, the benchmark yield had been only marginally above 2 percent and 1.3 percent respectively. When yields rise, traders expect higher interest rates from the Federal Reserve.
After data on Friday showed the US economy slowing less than expected and wage growth quickening, the market consensus for four increases by the Fed this year was cemented, although no hike is expected at the Fed’s next meeting, which concludes this coming Wednesday (Thursday in Asia).
With the dollar’s rise this week, its narrative appears to be reverting to the norm. Earlier in 2018, the dollar’s trajectory had seemingly decoupled from that of US interest rates. Despite a steady rise in yields, the dollar sank by February 16th to a three-year low. It was speculated at the time that traders were instead choosing to focus on the US’ twin deficits, as well as the medium-term effects that higher interest rates might have on the economic cycle – higher rates might facilitate the end of current economic expansion.
Per the median estimate from a recent Bloomberg poll, the 10-year yield is set to climb further to 3.14 percent by year-end.
Among the majors, the hardest hit by the dollar’s success last week were the British pound and the New Zealand dollar. The latter broke an eight-day losing streak on Friday with its marginal climb to US$0.7085, but still settled 1.8 percent lower over the five days. The pound now buys US$1.3775, having lost 1.6 percent, assisted by data showing the UK economy growing at its slowest pace since 2012.
EUR/USD – the most active dollar pair – sank by 1.2 percent to US$1.2126. It had been as low as 1.2055 at one stage on Friday.
In other dollar news, the push towards de-dollarisation among the world’s oil-producing elite continues.
On Monday, Iran said that it would replace the dollar with the euro when reporting its foreign currency transactions. It will also encourage companies with links to the state to do the same within financial reports and other publications.
The decision follows that made by Venezuela in September to price its oil in Chinese yuan, the ruble-yuan “deal of the century” in 2014 between Russia’s Gazprom and China’s CNPC, and the introduction in March of yuan-denominated oil futures on the Shanghai Futures Exchange.
“The dollar has no place in our transactions today,” said Valiollah Seif, Governor of the Central Bank of Iran, last week.
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