Tuesday, 29 November 2016

Dollar pauses after Trump rally, retreats from 14-year highs

The dollar edged down against a basket of major currencies on Monday, surrendering some gains after a sharp rally that followed Donald Trump's surprise victory in the U.S. presidential election.

The greenback had surged more than 4 percent against a basket of currencies in the wake of the election earlier this month, with investors expecting a Trump administration to bring an expansion of fiscal policy, boosting inflation and pushing up interest rates.

But after hitting an almost 14-year-high of 102.05 on Thursday, the dollar dipped on Friday and added to those losses on Monday, with the index falling to 101.32.

The greenback fell as much as 1.5 percent to 111.32 yen, having soared more than 8 percent in the wake of Trump's victory to its highest levels in eight months against the safe-haven Japanese currency. However, it recovered about half of those losses, last down 0.6 percent at 112.38 yen.

Most analysts said the dip in the dollar since Friday was simply a corrective pullback with the greenback still on track for its strongest two-month gain since early 2015.

"It looks much more like a correction than anything else – a Monday morning clearing of the decks before the end of the month," said Societe Generale macro strategist Kit Juckes in London.

However, other analysts suggested that the dollar's dive against the yen was the result of the President-elect's tweets over the weekend. Trump alleged that "illegal" votes were responsible for his loss in the popular vote to Democratic challenger Hillary Clinton in response to a recount effort organized by Green Party presidential nominee Jill Stein.

"The blatant lie without any proof - and one that has been roundly challenged by all of the country's voting experts - was unprecedented in American politics and may have made some market traders doubt Mr. Trump's stability," BK Asset Management's Managing Director of FX Strategy Boris Schlossberg wrote in a note to clients.

The euro climbed as much as 1.1 percent against the greenback to an 11-day high of $1.0686, also boosted by the election of Francois Fillon as the centre-right candidate in next year's French presidential elections. The reformist former prime minister is now favoured to become president, with a flash opinion poll showing he would easily beat National Front leader Marine Le Pen in a run-off second round. The euro retreated from those gains by the start of North American trading, up 0.1 percent against the dollar at $1.0595.

Sterling slipped against the euro on Friday but was still on track for its longest run of weekly gains since early 2015, with investors switching their focus from the political risks facing Britain towards those facing the euro zone.

Data confirming that Britain's economy grew 0.5 percent in the third quarter, as anticipated, and that business investment expanded more than expected, had little impact on the currency.

Though the pound was down half a percent against the single currency on Friday at 85.23 pence per euro, it was on course for a fourth straight week of gains and was heading for its best month in eight years with just over three trading days of November left, after a 5 percent rise.

Some analysts said the euro - which this week hit 20-month lows against the dollar - had been given some support on Friday by speculation that the European Central Bank will delay any extension in its asset-purchase programme until January.

Sterling is still almost 10 percent weaker against the euro compared with before Britain's vote to exit the European Union, but it has climbed 5 percent since the start of November, as the euro has weakened on uncertainty over an Italian constitutional referendum in just over a week's time and over French and German elections next year.

Against the dollar, sterling is still down 16 percent since the Brexit vote, though it was 0.1 percent up at $1.2455 on Friday. Analysts are split over the broader outlook for sterling heading into early 2017, when Article 50 is due to be triggered, kicking off formal Brexit talks with Brussels.

"There seems to be a call for a near-term rally in sterling; we don’t really see that," said ING currency strategist Viraj Patel. "What we’re looking for is another layer of bad news and we suspect we may get it in the first quarter of next year.

"For Cable (sterling/dollar) you've got a double-whammy of higher U.S. yields plus the triggering of Article 50 – that brings about another layer of uncertainty," Patel added.

The U.S. Federal Reserve is widely expected to raise interest rates at its policy meeting next month and then to continue increasing them steadily over the course of next year, which should strengthen the dollar against most currencies.

The Bank of England, by contrast, cut UK interest rates to a record low of 0.1 percent in the aftermath of Brexit and is expected to keep them there for all of 2017.


Sterling drifts lower, unmoved by Vlieghe message

Earlier in the week, sterling got a small boost from the government's Autumn Statement on the budget that, while revising down growth forecasts, was more upbeat and growth-supportive than some had expected.

"The UK economy has been resilient so far following the UK’s referendum. We remain positioned for sterling upside over a 6 month horizon via options," wrote BNP Paribas strategists in a research note.

Reference: Dion Rabouin

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