Currencies: Dollar Index Hits 2018 High, Havens Yen And Swiss Also Rise

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The leading U.S. dollar index carved out another 2018 high Wednesday as geopolitics came back into focus and drove currencies.

Check out: Why it may be downhill from here for the U.S. dollar

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.17%  was up 0.2% at 93.411, after giving back some earlier gains saw the gauge hit a year-to-date high. Though struggling for traction over the last few sessions, the index has been on an almost unchecked rise since mid-April, during which it flipped its year-to-date performance to positive.

A broader measure of the greenback, tracking 16 rival monetary units, the WSJ Dollar Index BUXX, +0.04% slipped 0.1% to 86.86.

The euro EURUSD, -0.4309%  fell to $1.1801 versus $1.1837 late Tuesday in New York. The euro also fell sharply against the safe-haven Swiss franc and Japanese yen, hitting a five-week low of 1.1791 francs and a six-day low at ¥130.

Read: The euro could rally to $1.30 within 12 months, says currency strategist

Against the dollar, the same haven currencies also strengthened, with the buck fetching ¥110.19 USDJPY, -0.03% down from ¥110.35 as well as 0.9991 Swiss franc USDCHF, -0.0300% down from 1.0012 late Tuesday in New York.

The British pound GBPUSD, -0.1333%  fell to $1.3492 compared with $1.3505 on Tuesday.

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What is driving the market?

Global political developments drove financial market Wednesday. A senior North Korean official said Pyongyang wasn’t interested in a summit with the U.S. focused solely on denuclearization and accused Washington of trying to “impose on our dignified state the destiny of Libya or Iraq.”\

In a Wednesday statement attributed to Kim Kye Gwan, a senior foreign ministry official, North Korea said it doesn’t want to deal away its nuclear weapons for economic compensation or benefits.

That cast doubt on the North’s willingness to proceed with a planned June 12 summit with President Donald Trump in Singapore and drove perceived haven currencies, such as the Japanese yen and the Swiss franc higher.

Meanwhile, the dollar index gained on the back of a weak euro, which accounts for the biggest proportion of the ICE gauge. The EU is fearfully watching developments in Italy, where reports surfaced that Italy’s antiestablishment 5 Star Movement and far-right League plan to ask the European Central Bank to forgive €250 billion of debt. The draft was obtained by Huffington Post Italia.

Italy’s FTSE MIB stock index I945, -2.05%  slumped 2.1% on Tuesday. The yield on 10-year Italian government bonds rose TMBMKIT-10Y, +7.39%  13 basis points to 2.084%, according to FactSet.

What are strategists saying?

“Rising tensions in the Middle East and a possible breakdown in the growing detente with North Korea, plus falling stock markets and a big jump in VIX, all make for a good background for the ‘safe haven’ currencies,” said Marshall Gittler, chief strategist at ACLS Global. “In particular, speculators looking to sell euro apparently bought Swiss franc.”

“While the relationship between the dollar and longer-term U.S. yields had faded in late 2017 and early 2018, that correlation seems to have returned in the second quarter of 2018,” said Marios Hadjikyriacos, a currency strategist at brokerage XM. “Markets are becoming slightly more confident in the Fed delivering three more rate increases this year.”

What else is in focus?

Housing starts dropped 3.7% in April, falling to 1.29 million, which was in line with forecasts. Home-builder permits fell 1.8% to 1.35 million.

At that same time, Atlanta Federal Reserve President Raphael Bostic is due to address the economic outlook at Georgia’s Augusta Cotton Exchange.

Industrial production rose 0.7% in April, beating expectations of 0.6%, while industrial capacity in use rose to 78 in the same month, from a revised 77.6 in March.

Check out: MarketWatch’s Economic Calendar

In other assets, U.S. stocks started the day slightly higher, with all three key indexes in the green, despite brewing geopolitical risks.

U.S. Treasury yields gave back Tuesday’s advances. The 10-year government note TMUBMUSD10Y, +0.39%  last yielded 3.071, down 1 basis point.