US Dollar index falls to five week low as risk appetite returns

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27 March 2018

thomasdodds

The US Dollar slipped to its lowest level in five weeks against its trade-weighted basket on Monday as an easing in concerns over a trade war led to a return in risk appetite among FX traders.

C
urrency markets were in a much more optimistic mood following the news that the US and China are set to begin negotiations on trade, suggesting that the impact of President Trump’s trade policies may not be as severe as first feared. It is only a matter of a few weeks since Trump announced he was imposing tariffs on imports of aluminium and steel, sparing concerns that China could be set to retaliate with trade restrictions of its own.

The safe-haven Japanese Yen and Swiss Franc both eased as investors flocked to those currencies deemed as riskier. The Euro was one of the main beneficiaries of broad Dollar weakness, gaining over half a percent during the London session versus the greenback to touch a more than one month high. The rally came despite little in the way of major domestic economic news in the Euro-area.

With the economic calendar fairly light this week in the lead up to the traditionally quiet Easter weekend, the major currencies are likely to be driven largely by underlying trends. That being said, this morning’s business confidence data out of the Eurozone could receive some attention when released at 10:00 UK time.

Sterling jumps as investors ramp up rate hike expectations

Sterling also had an impressive day, up alongside the Euro and New Zealand Dollar as the best performing G10 currency over the course of the session, although it erased most of its gains this morning on month end flows.

The Pound continued to receive support from the growing expectation that the Bank of England could raise interest rates again at its next monetary policy meeting in May. The BoE continued to strike a hawkish tone in the minutes of last Thursday’s MPC meeting, while the surprise 7-2 split vote on rates appears to have convinced some of the more skeptical investors that had believed the bank could keep rates on hold until deeper into the year. Overnight index swaps (OIS) are now placing around a 70% chance of a May hike, which we think will trend towards 100% in the coming weeks, particularly should economic data in the interim, namely on the inflation front, surprise to the upside.

With the economic calendar similarly quiet in the UK today we instead look ahead to Thursday’s fourth quarter GDP growth data, which is expected to show a modest upward revision to the initial estimate.