The U.S. dollar strengthened against most of its major rivals on Friday, putting a popular gauge for the U.S. currency on track for its best week since late April.
Check out: How much the weak dollar lifted Q1 earnings for multinationals: Ameriprise
What are currencies doing
The ICE U.S. Dollar Index DXY, +0.19% which measures the dollar against six rivals, most notably the euro, was up 0.3% at 93.790. The index hit its highest level in 2018 this week and is on track for 1.3% weekly gain, its best such stretch since the period ended April 27, according to FactSet data.
The WSJ Dollar Index BUXX, +0.15% a broader measure of the greenback that also includes emerging-markets currencies, was up 0.3% at 87.25.
Check out: How much the weak dollar lifted Q1 earnings for multinationals: Ameriprise
The euro EURUSD, -0.2120% weakened against the dollar, changing hands at $1.1759, compared with $1.1794 late Thursday. The shared currency earlier hit a session low of $1.1752, marking its lowest level since Dec. 18, according to WSJ Market Data Group. The European unit is on pace for a monthly fall of about 2.5%.
Elsewhere, the British pound GBPUSD, -0.3107% slipped to $1.3459, compared with $1.3516 late Thursday. Sterling also lost some ground against the euro EURGBP, +0.0917% with one euro buying £0.8732, compared with £0.8728 in the previous session.
Against the Japanese yen USDJPY, -0.05% the dollar extended its gains, buying ¥110.90, from ¥110.77 late Thursday, hitting a four-month high.
The greenback also advanced versus the currencies of the U.S. trade partners Canada and Mexico. Versus the Canadian dollar USDCAD, +0.5387% the U.S. currency bought C$1.2901 from C$1.2810 a day ago, while it fetched 19.9712 Mexican pesos USDMXN, +1.0104% compared with 19.7338 late Thursday. Against the peso, this is the dollar’s highest value since early 2017.
Don’t miss: Bank of Canada has to weigh oil prices and Nafta risk for summer rate hike timing
What’s driving currency trade?
On a fundamental basis, the U.S. dollar has enjoyed a modest renaissance this week, with the currency bucked up by an acceleration in the rise of benchmark U.S. government bonds. That’s highlighted by the 10-year Treasury yield TMUBMUSD10Y, -1.39% climbing above 3.10% this week, and remaining near its highest level since 2011, picking up a sizable 12.9 basis points, or 0.129 percentage point, since the end of last week.
Higher rates can make dollars more attractive for investors. Climbing rates have been supported by strong economic data, which have fueled the view that the Federal Reserve will adopt an aggressive pace of rate increases, perhaps three further rate increases rather than two in 2018.
The greenback also has benefited from anxiety in the eurozone centered on Italian politics, as the country’s two largest populist parties on Thursday agreed to a coalition program that included plans to cut taxes and increase fiscal spending. Although the antiestablishment partnership doesn’t immediately appear to threaten the southern European country’s membership in the eurozone, it raises questions about longer-term fiscal health.
Credit-ratings firm DBRS warned on Thursday that the economic proposals from the 5 Star Movement and League could threaten Italy’s credit rating, according to Reuters, a factor that could elevate its borrowing costs.
Meanwhile, investors are also focused on trade on two fronts. The U.S.-China trade are engaged in tense negotiations in Washington to resolve trade differences, with potentials for a trade conflict between the two largest economies in the world to ripple across the globe. Separately, investors are tracking the progress of the renegotiation of the North American Free Trade Agreement. While market participants still expect a deal to be reached this month between the U.S., Canada and Mexico, voices about a delay of talks are getting louder. On Thursday, Canada’s Prime Minister Justin Trudeau said a sunset clause that the U.S. demands, which would put Nafta up for renegotiation every five years, was a sticking point.
What are strategists saying?
“After being fairly calm in the aftermath of the early March election, the combination of populist and nativist forces, coupled with what appears to be an expensive program for one of the most indebted countries, is spooking investors,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a Friday note.
“The euro, for example, has fallen each day this week. It recorded its low for the year on Wednesday near $1.1765. It has been unable to distance itself much from the low. It has straddled the $1.18 level, where there is a 1.9 billion euro option expiring today. With this week in tow, the euro has fallen in 10 of the past 13 weeks,” he said.
What else is in focus?
First quarter advance services read 5.3%, rising from the final quarter of 2017.
On the Fed speaker front, Cleveland Fed President Loretta Mester said the Fed should publish a financial stability report to highlight the central bank’s assessment of vulnerabilities in the financial system, speaking at a European Central Bank conference on macroprudential and monetary policy on Friday.
Meanwhile, Fed Gov. Lael Brainard earlier spoke about digital currencies but didn’t comment on monetary policy at the annual conference of the Association for Neighborhood and Housing Development.