The dollar crept up on Friday, reflecting investor confidence in the US economy, despite criticism by President Donald Trump of the Federal Reserve and a sell-off in US equities.
The decline in stocks has yet to spread into foreign exchange markets, with emerging market currencies still appreciating and the safe-haven Japanese yen and Swiss franc not budging significantly.
Concern about a trade war between the United States and China and expectations interest rates will rise further in coming months have underpinned the dollar’s 2.5 per cent rise since July.
But a drop in US Treasury bond yields and weaker-than-forecast rise in US consumer prices saw the dollar shed half a per cent on Thursday as traders cut their bets on Federal Reserve rate hikes.
Hedge fund have staked out their longest dollar positions since the end of 2016 and markets are focused on any tweak in data that could alter the Fed’s thinking.
The dollar index, a gauge of its value against six major currencies, traded flat at 95 on Friday, down from its monthly high of 96.15 on Tuesday.
“We doubt the dollar will derive much further cyclical support through the remainder of the year. Political uncertainty could also undermine the dollar ahead of the mid-term elections on 6 November,” said Derek Halpenny, European head of Global Markets Research at MUFG.
Halpenny added: “The longer-term negative structural implications of the growing US twin deficits will increasingly weigh on US dollar sentiment.”
Other analysts see few signs the dollar will fall further. Federal officials said last month they expected three rate hikes in 2019.
“If the equity markets were to calm down again quickly without developments spreading to other asset markets, there is no reason in our mind why the Fed should not continue its rate hikes as planned,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.
Reichelt added: “The dollar will be able to maintain its current strong levels for now but further appreciation potential is limited.”
The euro was the main beneficiary of dollar weakness on Friday, reaching a weekly high at 1.1611 after minutes of the last European Central Bank meeting set a positive tone.
The minutes suggested the ECB was on track to normalise its ultra-loose monetary policy this year despite concern about slowing growth in Europe.
“We’ve heard quite a bit of comment from euro zone policymakers recently about rising inflation and the message is consistent, which is that price pressures are growing,” said Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.
The Japanese yen, a preferred currency in times of market turbulence, traded at 112.34 on Friday. It had strengthened to 111.83 versus the dollar on Thursday, its highest since September 18.
The Australian dollar was at $0.7122, recovering from Monday’s two-year low of $0.7039.
The rally was aided by promising news out of China, its biggest trade partner.