Dollar bulls checked by US rate policy and trade concerns

Emerging market currencies big winners after last week’s Federal Reserve meeting

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The US dollar is being hit by investor reaction to the Federal Reserve’s measured policy tone and concerns over the Trump administration’s protectionist trajectory and the legislative obstacles it faces.

While the index measuring the dollar against a basket of its main peers was broadly flat on Monday, analysts were downbeat about its prospects of recovering the momentum that saw it gain 8 per cent in the fourth quarter of last year.

Despite last week’s interest rate rise, investors interpreted it as a “dovish hike” in view of the Fed’s caution on the path of further rate tightening this year. The dollar index has fallen 1.4 per cent since the central bank meeting on Wednesday and is heading towards the 100 level.

JPMorgan described the dollar as “listless”, while Citigroup dropped its prediction of euro-dollar parity at the end of the year.

Marc Chandler at Brown Brothers Harriman said the prospect of other central banks raising rates was also spurring dollar losses.

Data ahead of the Fed meeting showed a retreat in dollar long positions, while there was a sharp pullback in selling the euro following the European Central Bank meeting that commentators interpreted as tilting towards hawkishness.

“If the 100 level is breached now, a return to the early February low [of 99.23] looks more likely,” Mr Chandler said.

The dollar’s weakness is benefiting emerging markets currencies, notably the South African rand that has rallied 4 per cent since last Wednesday and reached levels last touched in mid-2015. The Korean won rose 1 per cent to its highest level against the dollar in five months.

Analysts also said a weaker tone for the dollar reflected the absence of a clause on combating trade protectionism in the communiqué of the G20 finance ministers’ weekend meeting.

“We are closer to a currency war than we have been for a long time,” said Ulrich Leuchtmann of Commerzbank.

However, the G20 reaffirmed the need for countries to refrain from competitive devaluations and again committed its members not to target exchange rates for competitive purposes. That, said MUFG’s Derek Halpenny, underlined that “Washington remains cautious over changing the rhetoric on FX”.

Steven Englander, Citigroup’s head of forex strategy, warned that the dollar would head lower if the House vote on repealing Obamacare on Thursday was defeated, since it augured ill for the administration’s tax reform agenda.

“Bottom line: if it goes down in smoke it will probably take the US dollar down with it; as the odds of any significant legislative action fall, USD could hit the lows of the year against both majors and minors,” Mr Englander said.

The dollar’s direction is likely to come under increasing influence from non-US factors, said JPMorgan, including eurozone data and European political risk.

“This further enhances the sense that [the] US is losing its centrality in driving FX markets, after having dominated the FX narrative for many months post-election,” said JPMorgan analysts.

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