Wednesday, 17 May 2017

Dollar pressured by U.S. political turmoil, strong eurozone data

The dollar nursed its losses on Wednesday after taking a hit from solid eurozone economic data, a fall in U.S. yields on heightened turmoil in Washington and downbeat housing data that reduced expectations of a Federal Reserve rate hike next month.

The dollar index, which scaled a 14-year peak of 103.82 on Jan. 3 on hopes for tax reform and stimulus measures from the administration of U.S. President Donald Trump, gave back all of its "Trump bump" and wallowed near its lowest levels since Nov. 9.

The index, which tracks the U.S. currency against a basket of six major rivals, last stood at 97.929, down 0.2 percent on the day.

Pressure on the dollar increased after news that Trump asked his now-dismissed FBI Director James Comey to end the agency's investigation into ties between former White House national security adviser Michael Flynn and Russia, according to a source who has seen a memo written by Comey.

The memo raises questions about whether Trump tried to interfere with a federal investigation at a time when investors were beginning to doubt that his administration would be able to get a divided U.S. Congress to support its promised policy steps.

"Investors need to see if he can carry out all of his original ideas, compromise, and get organised," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

"There are still Japanese institutional investors who want to buy the dollar on dips, but for now, they're standing back to see what happens next, " he added.

The dollar skidded 0.5 percent to one-week lows against its perceived safe-haven Japanese counterpart and last stood at 112.56 yen.

"The political shenanigans in Washington concerning Trump appear to be denting appetite for the U.S. dollar at the moment, but it's run into technical selling as well," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong.

"The move in FX looks to be exaggerated by the addition of the systematic selling of the U.S. dollar by technical trading accounts," she said.

U.S. Treasury yields fell after data showing U.S. homebuilding unexpectedly dropped last month, adding to a recent spate of mixed data that has raised doubts about the U.S. monetary policy outlook. Separate data showed U.S. manufacturing production recorded its biggest increase in more than three years in April.

The yield on benchmark 10-year notes fell to a two-week low of 2.291 percent in early Asian trade, down from its U.S. close on Tuesday of 2.327 percent. It last stood at 2.301 percent.

Interest rate futures showed the market was still pricing in a nearly three in four chance that the Fed will implement a June hike, but that was down from over 80 percent a week ago, according to the CME Group's FedWatch Tool.

Investors were pricing in slightly below an even chance for two or more rate increases in 2017, despite central bankers' stated view that they will hike two more times this year.

The euro added 0.1 percent to $1.10965 after earlier touching $1.1098, its highest since November.

Against the resurgent Japanese currency, the euro tumbled 0.4 percent to 124.88, as investors locked in gains following the European currency's move to a 13-month high of 125.815 on Tuesday.

Data on Tuesday showed the euro zone growing at 1.7 percent year-on-year in the first quarter, in line with expectations.

Reference: Reuters Tokyo

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