Dollar extends advance as rate differentials, trade spat drive trading
The leading dollar index hit a seven-month high Friday, boosted by lingering U.S. economic optimism, even as global markets braced for the next round of trade jabs between economic powerhouses China and the U.S.
The still largely disparate interest-rate policy paths between the U.S. and Europe are setting up a test of the key $1.15 level for the euro-dollar exchange rate in the weeks ahead, many strategists have said. The euro was headed for its worst weekly loss in 19 months after the ECB this week signaled interest rates there would be left at record lows into at least mid-2019.
How are currencies performing?
The ICE U.S. Dollar Index DXY, -0.09% which measures the buck against six rivals but is heavily weighted toward the euro, was up 0.1% at 94.837. It is on track for a roughly 1.4% weekly gain. The WSJ Dollar Index BUXX, -0.02% a broader gauge of the greenback, was steady at 88.01.
The euro EURUSD, +0.2420% despite its weekly loss firmed slightly at week’s end, trading at $1.1591 from $1.1569 late Thursday in New York.
Read: Investors should treat the euro rally with caution, analysts say
The dollar strengthened against the Japanese yen USDJPY, +0.02% , buying ¥110.71 compared with ¥110.63 late Thursday in New York.
Also see: How this week could reignite the dollar-yen rally
The British pound GBPUSD, +0.1357% traded at $1.3279 from $1.3260 Thursday.
Against the euro, sterling dropped 0.2 percent to 87.41 pence but remained above the 88-pence range it had traded at before the euro’s selloff on Thursday.
Don’t miss: Trade spat means more pain in story for Canadian dollar: analyst
Also see: Why emerging-market investors are swooning over Colombia’s peso
What’s driving the market?
Central bank policy remained in focus as the Bank of Japan stuck to its easing policy, keeping short-term interest rate at minus 0.1% and its target for the yield on 10-year government bonds at around 0%.
The decision comes just a day after the European Central Bank said it plans to ends its quantitative easing program in December, but will keep rates at record lows at least until after next summer. The ECB stance caught some currency traders wrong-footed, resulting in shared currency’s worst one-day slide since June 2016, according to WSJ Market Data Group.
And that move came a day after the Fed on Wednesday raised interest rates as expected but also ratcheted up rate projections for 2018 and 2019 and sounded an optimistic note on the U.S. economy. Against that rate backdrop, the greenback has risen 2% this year, rebounding after an almost 9% loss in 2017.
Focus turns to the Bank of England’s meeting next week. Market participants largely expect the BoE to keep rates on hold next week, but will be looking for any signs that the central bank is more confident in the economy after a difficult first quarter.
On the U.K. political front, Prime Minister Theresa May’s ongoing efforts to convince her colleagues of her plans for Brexit will be under watch. May fended off a parliamentary rebellion this week over parliament’s role in the Brexit process and ensured her government’s all-important EU withdrawal bill passed.
As for the trade picture, the U.S. is getting ready for a second wave of tariffs on China, having nearly finished a list of levies on $100 billion worth of Chinese goods. The latest development comes after President Donald Trump reportedly approved the first round of $50-billion tariffs on Chinese goods, although it wasn’t clear when the move would take effect. Beijing responded to the approval by saying it will impose levies of its own on $50 billion in U.S. products.
Read: A pumped-up U.S. economy does have some downsides — here are two of them.
What are strategists saying?
“The movements in dollar-euro over the past few days are a reminder that Fed and ECB policy are still important drivers of the exchange rate. Our view remains that their policies will provide ongoing support for the U.S. currency in the rest of 2018, before becoming a significant drag in 2019,” said John Higgins, chief markets economist with Capital Economics.
“BoJ still seems unlikely to even consider altering its stimulus program anytime soon, which in isolation, is a factor arguing for a weaker yen from a relative rates perspective, especially against currencies of nations who are normalizing policy, like the dollar,” said Andreas Georgiou, analyst with brokerage XM.
What U.S. economic data are on the calendar?
The Empire State index for June, a regional economic snapshot from the New York Federal Reserve, is due at 8:30 a.m. Eastern Time, followed by industrial production and capacity utilization for May at 9:15 a.m. The consumer sentiment index for June is on the docket at 10 a.m.
In Federal Reserve speakers, Dallas Fed President Rob Kaplan will appear in a moderated discussion at a Fort Worth Chamber of Commerce lunch at 1:30 p.m. Eastern.
Rachel Koning Beals
Rachel Koning Beals is a MarketWatch news editor in Chicago.
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