U.S. dollar notes are seen in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration
January 11, 2019
By Tom Finn
LONDON (Reuters) – The euro was headed on Friday for its biggest weekly rise in more than four months with the dollar weakening on cautious signals from the Federal Reserve about further rate hikes.
The euro has been stuck in a $1.12-$1.15 range for the last three months due to growth fears and signs the European Central Bank is unlikely to end its stimulus soon.
But dovish Fed minutes this week have triggered dollar-selling, lifting the euro as high as $1.1581 and propelling it past a 100-day moving average for the first time in three months.
The single currency has gained 1.2 percent this week.
“The euro remains supported by the soft dollar story. The risk of a short squeeze perhaps to the $1.1620/ area remains,” said Chris Turner, head of foreign exchange at ING in London.
He added, though, that a soft macro outlook suggests “Europe will struggle to attract rotational flows out of U.S. markets”.
Despite its recent gains the euro has been pressured by a slew of weaker-than-expected economic data, especially from France and Germany.
In addition, the ECB is widely expected to remain accommodative in 2019, which traders say should prevent the currency from breaking much higher.
Another reason for euro strength could be a resurgence this week in the offshore Chinese yuan.
“A stronger yuan means that 23.6 percent of the euro’s trade-weighted basket is going up, and that means that even a currency weighed down by domestic economic and political woes can get a little lift against the dollar,” said Kit Juckes, a currencies strategist at Societe Generale.
The yuan has breached the key 6.8 per dollar level in both onshore <CNY=CFXS> and offshore <CNH=EBS> trade.
China and the United States have extended trade talks in Beijing, boosting oil prices and broader sentiment.
That has lifted the yuan to its highest level since late July along with recent assurances from Beijing of further fiscal boosts to the slowing economy.
U.S. Treasury Secretary Steven Mnuchin said late on Thursday that Chinese Vice Premier Liu He will “most likely” visit Washington later in January for trade talks.
Currencies such as the Australian dollar <AUD=D3>, a gauge of risk appetite, and the New Zealand dollar <NZD=D3>, are likely to see further gains if a U.S.-Sino trade deal is reached, said Sim Moh Siong, currency strategist at Bank of Singapore.
The dollar index <.DXY> on Friday fell by 0.3 percent to 95.195. The index has fallen around 3 percent since mid-December on expectations that a slowdown in growth, both in the United States as well as globally, will restrict the Fed from raising rates in 2019.
Fed Chairman Jerome Powell reiterated on Thursday the U.S. central bank has the ability to be patient on monetary policy given that inflation remains stable.
Markets are now pricing in no further rate hikes by the Fed this year.
In 2018, the greenback outperformed its peers, gaining 4.3 percent as the Fed hiked rates four times on the back of a strong domestic economy.
Elsewhere, sterling <GBP=D3> traded up 0.6 percent at $1.2823 after a media report cited cabinet ministers as saying Britain could seek to delay its scheduled departure date from the European Union.
British Prime Minister Theresa May must win a vote in parliament to get her Brexit deal approved or risk seeing Britain’s exit from the European Union descend into chaos. The vote is now due to take place on Jan. 15.
(Additional reporting by Vatsal Srivastava; Editing by Toby Chopra and Andrew Heavens)