Dollar pulls back against European rivals, maintains 2-month high versus yen
The U.S. dollar mostly slipped against leading rivals on Thursday, failing to build on the gains from a day earlier when Federal Reserve meeting minutes suggested that reducing the massive balance sheet that was part of economy-juicing policy at the central bank may start as soon as September.
The ICE Dollar Index DXY, -0.23% which measures the greenback against a basket of six rival currencies, slipped 0.1% at 96.10. The dollar fell mostly against its European rivals but posted a small advance against its Japanese counterpart, keeping the buck at a two-month high.
The ICE dollar index last week closed out 2017’s second quarter with its worst quarterly loss since September 2010, pressured by hawkish comments from the heads of the European Central Bank and the Bank of England, which lifted their respective currencies relative to the dollar. Doubts about President Donald Trump’s pro-growth agenda becoming a reality have also clipped the greenback’s upside.
Since 2009 the Fed had bought government bonds swelling its balance sheet to $4.5 trillion during quantitative-easing programs to stimulate the economy.Gradually reducing the balance sheet by not reinvesting the proceeds and letting maturing bonds expire, the Fed can effectively tighten monetary policy. Analysts believe that reducing the balance sheet will push borrowing rates and the dollar higher, but possibly in a less aggressive way than an outright rate increase, market analysts say.
The euro EURUSD, +0.3260% was fetching $1.1375 compared with $1.1351 late Wednesday. The euro climbed after the release of European Central Bank minutes, which showed the panel discussed removing its easing bias at the June meeting but ultimately decided to maintain its stance.
Elsewhere, the pound GBPUSD, +0.1237% gained to $1.2953 versus $1.2933 late Wednesday as investors continued to weigh mixed data that complicate Bank of England efforts to raise record-low interest rates for the first time in 10 years.
The pound has weakened somewhat this week as purchasing managers’ index surveys have pointed to a softening economy, but it is still only around a cent away from nine-month highs hit against the dollar in May.
Morgan Stanley wrote in a note to clients that despite data pointing to weakness following June’s parliamentary elections they were “loving” sterling.
“Our sterling optimism finds its sterling in what we call ‘Brexit economics’ and the [Bank of England] reconsidering [pound] weakness and its impact on the economy,” they wrote. “Sterling weakness has undermined living standards, and with inflation above the BoE’s 2% target and its own staff projections, stabilization should now be on the BoE’s agenda. Talking up rate expectations is a sufficient tool to reach this target.”
The dollar had also strengthened slightly against the euro, the yen and emerging-market currencies midweek, as geopolitical tensions escalated ahead of the Group of 20 summit in Germany later this week. On Tuesday, North Korea successfully launched its first ballistic missile capable of reaching the parts of the U.S.
President Donald Trump said Thursday he is considering “some pretty severe things” in response to North Korea’s continued efforts to develop nuclear weaponsthat can reach the U.S.
Against the yen USDJPY, -0.04% the dollar traded at two-month highs, fetching ¥113.33, compared with ¥113.26 late Wednesday.