Dollar Languishes Near July Lows as Investor Risk Appetite Boosts Rivals

Image © Adobe Images

- USD hits July lows on rampant investor appetite for risk.

- USD bottom of major currency barrel ahead of year-end.

- U.S.-China optimism, Fed balance sheet policy, hit USD. 

- EUR, JPY and GBP gains drive USD index to July lows.

- But USD lower against all majors barring CAD and SEK.

- Chicago PIM and trade balance surprise fail to turn tide.

The Dollar languished near July lows in a favourable market for riskier currencies Monday as a dearth of supply and fresh optimism among investors over the outlook for U.S. and Chinese trade relations appeared to deflate the safe-haven greenback. 

Currency traders appeared to sell the Dollar en masse Monday, leading the greenback to retreat from every one of its major rivals other than the Canadian Dollar and Swedish Krona in the opening session of the week, making it the worst performing major currency. The Dollar index was down 0.23% at 96.72 in the noon session, near its July lows, with weakness broad-based. 

Dollar index losses were driven in substantial part by increases in the Euro, Pound Sterling and Japanese Yen, which collectively account for around 82% of flows measured by the barometer, which is designed to track the U.S. currency relative to its most frequently traded rivals. Losses were offset to a meagre extent by Dollar gains over the Swedish Krona and Canadian Dollar.  

"The White House would like to see more of this, but for once at least, the US trade deficit showed a solid, and surprising improvement in November. Other than in automotive, where the end of a US strike would have drawn in parts supplies, imports were down across the board, and off 1.3% in total, while exports enjoyed a broad based 0.7% rebound," says Avery Shenfeld, chief economist at CIBC Capital Markets. "The result could bump up forecasts a bit for Q4 GDP, but its too early to call this a trend."

Above: Dollar index shown at daily intervals. 

The Dollar was undeterred from its descent by trade balance data that showed the U.S. goods and services deficit falling to its lowest level since 2017 in November, with the mismatch between imports and exports falling from -$66.8bn to -$63.2 bn when markets had looked for an increase to -$69.2 bn. A falling deficit indicates increased demand for the currency in question and often augures faster economic growth. 

The Chicago PMI, which measures activity in the third largest U.S. city and that beat expectations for December on Monday, was also not enough to disrupt the Dollar downtrend. The PMI rose from 46.3 to 48.9 this month when markets were looking for a rise to onlhy 48.2. The Institute for Supply Management (ISM) manufacturing PMI due out at 15:00 Friday is more significant for markets, although it's also expected to rise. 

"The US dollar is the worst performing G10 currency overnight as this morning it broke below the 96.750 level to its lowest in 6 months. The main drivers of the weaker dollar have likely been risk appetite holding up in the wake of comments from the US pertaining to a Phase One trade deal recently as well as the US Federal Reserve’s continued repo operations," says Lee Hardman, a currency analyst at MUFG. "The Federal Reserve will conduct its last repo operation of the year today potentially providing as much as $260 billion this week."

Above: Euro-to-Dollar rate shown at 4-hour intervals. 

Price action came after Chinese ambassador to the U.S. Cui Tiankai was reported to have said that China will honour commitments it's made as part of the 'phase one deal' to temporarily end the tariff conclict with the U.S. This followed remarks from President Donald Trump last week, who said he and his Chinese counterpart will sign the deal "when they get together". 

Trump said ahead of the holiday that China has already begun to purchase the agricultural products it reportedly agreed to buy as part of the October 11 deal. The pact is still to be signed and nobody other than the negotiators have seen its full contents but the steady drip of comments affirming the agreement is easing market concerns about if it'll ever see the light of day. 

However, analysts say there were other factors at work against the Dollar Monday, not least of all efforts by the Federal Reserve (Fed) to keep the interbank financial system adequately supplied with cash. And reports of a U.S. missile strike on an Iranian-backed militant group in Iraq and Syria.

Above: Pound-to-Dollar rate shown at 4-hour intervals. 

"The drivers for the US dollar haven’t been particularly clear in recent months, but the last couple of weeks’ action suggests that the market is finally celebrating the generous Fed liquidity provision into year end and that the Fed has now clearly avoided the issues so thoroughly fretted by market participants since evidence of USD funding issues back in September," says John Hardy, head of FX strategy at Saxo Bank. "The US dollar is weaker across the board."

A September shortage of 'bank reserves' has led the Fed to flood the interbank monetary system with cheap financing in recent months, to avoid an unwelcome increase in bank funding costs. But with the year-end accounting period now upon the market demand for the Fed's Dollars has waned, leading its auctions to go undersubsribed and the supply of Dollars on the market to increase. 

The Fed had in late 2017 began to reverse the 'money printing' response of the crisis years by slowly taking back what it spent on government bonds as part of those efforts. But the 'balance sheet unwind' left the domestic and international financial systems with a shortage of Dollars, which roiled financial markets that are sensitive to changes in the supply and cost of the greenback.

Above: USD/JPY rate shown at 4-hour intervals. 

This year that Dollar shortage, in a roundabout way, began to cause ructions in some obscure U.S. markets and initially led the Fed to stop shrinking its balance sheet. But the bank went a step further in September when it said it would resume buying government bonds on a regular basis to ensure there's enough Dollars for those parts of the financial system to function effectively.

"Short-term dollar oversupply could potentially hold back dollar gains going into year-end as banks near balance-sheet limits. Another oversubscribed operation like that could weigh further on the dollar," says MUFG's Hardman. "Chinese PMI data released on Tuesday (official manufacturing) and Thursday (Caixin) could further support risk appetite if these show improvements which will also constrain dollar performance."

The Fed has been pumping Dollars into money markets at a rate of knots using reverse-repurchase operations, partly in the hope of avoiding further mechanical problems around year-end when for accounting reasons, demand for Dollars typically increases among financial institutions.

Above: AUD/USD rate shown at 4-hour intervals. 

The year-end dearth of Dollars was either wearing off of its own accord last week or has been effectively countered by the Fed because the three most recent 'operations,' or auctions, were undersubscribed by the market heading into the weekend. And that's been stoking investor suspicions about a possible over-supply of Dollar hitting the market in the New Year. 

"There is still some pressure in the system for the turn, but it seems within the ranges that are regarded as normal," says Marc Chandler, chief market strategist at Bannockurn Global Forex. "Sterling is firm as it continues to recover from the post-election profit-taking that saw it slide from $1.35 to nearly $1.29.  It rose to $1.3125 today, and the $1.3140 area corresponds to the (38.2%) retracement of the post-election drop...Rising commodity prices, especially oil, risk-on sentiment, and a small premium offered by Canada over the US on two-year money have helped underpin the Canadian dollar.  It is the strongest of the major currencies this year, gaining above 4.35% against the US dollar."

Time to move your money? The Global Reach Best Exchange Rate Guarantee offers you competitive rates and maximises your currency transfer. Global Reach can offer great rates, tailored transfers, and market insight to help you choose the best times for you to trade. Speaking to a currency specialist helps you to capitalise on positive market shifts and make the most of your money. Find out more here.

* Advertisement