Dollar under pressure as stock market retreats again

The U.S. dollar softened against its major rivals early Tuesday, notably against the Japanese yen, as stocks showed signs of exhaustion following a two-session rebound.

What are currencies doing?

Extending earlier losses, the ICE U.S. Dollar Index

DXY, -0.46%

which measures the currency against six main rivals, fell 0.6% to 89.633. The index saw its best weekly gain since December 2016 last week, as U.S. equities suffered their worst weekly pullback since that same year. The broader WSJ U.S. Dollar Index

BUXX, -0.38%

fell 0.5% on Tuesday to 83.66.

The dollar declined sharply against the Japanese yen

USDJPY, -0.87%

USDJPY, -0.87%

One dollar bought ¥107.63 versus ¥108.65 late Monday. The greenback also dropped against the Swiss franc

USDCHF, -0.5855%

falling to 0.9334 against 0.9394 late Monday in New York.

The yen and franc each gained last week as investors sought safety from volatile stock markets. Those currencies are considered traditionally as havens in times of economic and financial upheaval.

Read: Why the yen is a barometer of how much the equity downturn infects currencies

The British pound

GBPUSD, +0.2891%

 jumped to a high of $1.3925 after inflation data came in higher than expected, and last changed hands at $1.3885, up from $1.3837 late Monday. Meanwhile, the euro

EURUSD, +0.5125%

 rose to $1.2360, from $1.2293 late Monday.

Read: Here’s what Germany’s next finance minister could mean for the euro

What is driving the market?

The dollar weakened against its major rivals, even as stocks turned lower at the beginning of the U.S. session. Over the past week, when equities tumbled, the buck had been a place investors turned to for safety, but the trend didn’t resurface on Tuesday. Haven assets are known for their ample liquidity, so even as U.S. stocks were doing poorly, the dollar was attractive for traders.

Investors are keeping a close eye out for Wednesday’s U.S. consumer-price-inflation data, which will be a barometer for the anticipated March interest rate increase by the Federal Reserve.

Market participants are further considering over a $4.4 trillion budget proposal by U.S. President Donald Trump on Monday, which would lift military and border security spending, and cut into many social programs.

Also read: Why Trump’s $1.5 trillion infrastructure package could be another weight on the dollar

The yen firmed as investors wondered about what is next for the Bank of Japan, which is about to appoint a new slate of top policy makers. Haruhiko Kuroda, a proponent of ‘Abenomics’ and lose monetary policy, is expected to be reappointed to a second five-year term as governor, but there are concerns a more-hawkish team may be assembled.

What are the data?

Elsewhere, Cleveland Fed President Loretta Mester said she was in favor of the same number of rate increases the Fed completed in last year in 2018, though the tax and government spending plan could change that.

Also see: Powell says Fed ‘will remain alert’ to any financial stability risks

U.K. annual consumer price inflation for January came in at 3%, just ahead of a consensus estimate of 2.9%. However, the core CPI reading jumped to 2.7%, which leaves it at the highest level since 2011. That could increase pressure on the Bank of England to raise interest rates at a faster pace than it had anticipated.

Higher interest rates tend to strengthen the currency of the country involved, while reductions in interest rates often have the opposite effect.

What are strategists saying?

“FX traders were initially pleased with the [U.S.] budget deal to reopen the government, but they are not as encouraged by President Trump’s budget proposal for 2019 that signaled a disregard for the deficit,” said Kathy Lien, managing director of FX strategy at BK Asset Management, in a note.

“With a lower level of fear came a lower level of ‘flight to safety’ into the dollar, and [the U.S. dollar] retreated somewhat. There was also some disappointment in Trump’s infrastructure plan, which seems unlikely to ignite the kind of spending that had previously been expected. That weighed on Treasury yields and thereby pressured the dollar,” said Marshall Gittler, chief strategist at ACLS Global, in a note to clients.

“We see the case for the [U.S.] CPI data release tomorrow to play a major role on further stabilization of the market. Overall, it could be the case that the U.S. dollar may weaken in the short term as further confidence is added to the stock market,” said Peter Iosif, senior research analyst at IronFx, in a note to clients.

Which other currencies are in focus?

The South African rand

USDZAR, -0.0520%

 moved slightly lower against the dollar as South Africa’s President Jacob Zuma clung to power even after leaders of the African National Congress party ordered him to step down. Zuma has been resisting pressure to resign that come amid corruption allegations and a stagnating economy.

Chief whips of all parties in parliament were due to meet Wednesday morning, apparently to prepare for a vote of no confidence against Zuma, who is not viewed as a market-friendly leader. One dollar last bought 11.9473 rand, up 0.1%, according to FactSet data.

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Written by sortiwa