Dollar slips after rally, but analysts see more upside ahead


The dollar moved slightly lower against other major currencies on Thursday, pulling back after a late-day rally in the prior session that was sparked by a Federal Reserve report suggesting U.S. inflation is picking up.

However, analysts said the greenback could swing back higher again, as traders pick up the currency after a recent losing run that sent a key dollar index to a three-year low.

What are currencies doing?

The ICE U.S. Dollar Index

DXY, -0.31%

 , which measures the greenback against a basket of six rivals, was down 0.3% at 90.75, according to data on the MarketWatch site. Other terminals showed a gain for the ICE index, largely because they use a different closing time for the greenback. The index earlier this week hit a three-year low.

The broader WSJ Dollar Index

BUXX, -0.16%

 was down 0.1% at 84.61.

The euro

EURUSD, +0.3036%

 rose to $1.2217 from $1.2188 late Wednesday in New York.

The pound

GBPUSD, +0.1446%

 also advanced, buying $1.3842 compared with $1.3830 on Wednesday.

The dollar was unchanged against the yen

USDJPY, +0.00%

 , trading at ¥111.28.

What is driving the market?

There wasn’t any specific driver behind the dollar weakness on Thursday, and the action was seen more as a pullback after a rally late in Wednesday’s session. That gain came after the Fed’s Beige Book said the central bank still is on track for three rate rises this year as the pace of growth continues to be “modest to moderate.”

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The report also noted that most districts are starting to see “ongoing labor market tightness,” a factor that could lead to a rise in wages and inflation. Higher inflation could accelerate the Fed’s rate hikes in 2018, which would be supportive for the dollar.

The greenback had a rough end to 2017 and weak start to 2018, as traders started to focus on hawkish noises from other global central bank, including the European Central Bank.

However, after the shared currency jumped to a three-year high against the dollar earlier this week, several ECB officials have expressed concerns that the strong euro is putting downward pressure on inflation. ECB policy maker Ewald Nowotny said on Wednesday that the euro strength is “not helpful,” while ECB Vice President Vítor Constâncio told Italian newspaper la Republica that monetary policy could stay “very accommodating for a long time.”

What are strategists saying?

“The near term technical prospects for the dollar continue to improve as the weakness seen over the past few weeks shows signals of a retracement. This comes with the Fed’s Beige Book suggesting that growth and inflation are picking up, whilst Apple unveiled plans to repatriate its overseas earnings that could mean a tax bill of around $38 billion,“ said Richard Perry, market analyst at Hantec Markets, in a note.

“This has been dollar supportive, but on the flip-side the jawboning from ECB board members seems to have begun, in an attempt to take the steam out of the recent euro rally… Although there has been a slight rebound on the euro this morning, this could be the beginning of a corrective slip on the euro if the jawboning continues,” he added.

What to watch on Thursday?

Economic data reports scheduled for release Thursday include updates on weekly jobless claims, housing starts and building permits, all due at 8:30 a.m. Eastern Time. The Philly Fed manufacturing index for January is expected at 10 a.m. Eastern.

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