The dollar slumped on Tuesday, the first full trading day of 2018, with a key dollar index falling for a fifth-straight session to trade at a more than three-month low as traders pondered what’s next for interest rates and the economy.
What are currencies doing?
The ICE U.S. Dollar Index DXY, +0.11% dipped 0.3% to 91.836 to trade at its lowest level since September, according to FactSet data. The index, which measures the greenback against six rival currencies, lost 9.9% in 2017, suffering its worst year since 2003.
The broader WSJ U.S. Dollar Index BUXX, +0.05% which compares the dollar with a wider range of currencies, slipped 0.4% to 85.60 on Tuesday.
The euro EURUSD, -0.1824% rose to $1.2060 on Tuesday, up from $1.2006 late Monday in New York. Although the shared currency slipped back from session highs, it traded around a level not seen since September.
Elsewhere in Europe, the British pound GBPUSD, +0.0147% climbed to $1.3600 from $1.3502 on Monday, also trading at a multimonth high. In fact, sterling has not been above $1.36 since Britain’s vote to leave the E.U. in summer 2016.
Against the Japanese yen USDJPY, +0.02% the dollar fell to ¥112.25 compared with ¥112.67 on Monday.
Also among the winners against the dollar: the Chinese yuan USDCNY, +0.1463% which has risen 1.2% in the period since Christmas. Besides dollar weakness, the Chinese currency also benefited from supportive manufacturing PMI data that came out better than expected, market participants said. One dollar last bought 6.4946 yuan, down from 6.5031 late Monday in New York.
What’s driving the markets?
Expectations of higher U.S. interest rates later this year and the passage of the Republican tax bill have failed to give the dollar a lift. Analysts say it’s partly because of the good news for the buck had already been priced in, and partly because traders wonder how much the tax cuts will actually boost the economy.
Falling U.S. bond yields were cited as one reason for dollar weakness last week, when the yield for the benchmark 10-year Treasury note TMUBMUSD10Y, +0.30% Wednesday saw its biggest one-day drop in more than three months. Since, yields have crept higher and are now at 2.433%.
What are strategists saying?
“The disparity between the rising U.S. rates and sinking buck must be particularly frustrating to the dollar bulls, but the price action suggests that the market simply does not believe the high growth scenario of the Fed,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management, in a note.
“Fed-funds futures are still barely pricing in the prospect of only two rate hikes this year and until sentiment changes, it’s difficult to see how the buck can climb,” he added.
“We expected some follow through buying, given the momentum in the second half of December. We see the near-term risk extending toward $1.2165, which is the 50% retracement of the euro’s decline from the 2014 high near $1.40,” wrote Marc Chandler, global head of currency strategy for BBH about the eurozone currency’s upbeat start to 2018.
“Latest [Commodity Futures Trading Commission] data recorded a net long, noncommercial sterling position for the fourth successive week, maintaining the risk of a sharp selloff, if there are economic or political setbacks in early 2018,” according to a note from Sucden Financial.
What are the data?
The U.S. data calendar was light, with only the final reading of the Markit manufacturing PMI for December on the docket.
The final reading for the indicator came in at 55.1, versus a previous reading of 55.0. A reading of more than 50 indicates expansion.