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Euro benefits from weak dollar, sterling close to six-month high

LiveMint logoLiveMint 19-04-2017 Jemima Kelly

London: The euro hit a three-week high on Wednesday, benefiting from a dollar weakened by lower US rates and doubts over President Donald Trump’s promised fiscal boost, while the prospect of a snap British election kept sterling near a six-month peak.

After the British pound took centre-stage on Tuesday with its second-largest one-day rise since 2008, the Australian dollar was the biggest mover on major currency markets on Wednesday, sliding 0.7% as iron ore prices took a dive .

With the first round of France’s presidential election just four days away and the polls showing just a few points between the top four candidates, analysts said any gains in the euro would be capped, and the single currency was only marginally higher on the day at $1.0837.

The main driver for that move, said strategists, was a weaker dollar and the pricing out of the bet that the US Federal Reserve would raise interest rates three times this year.

That has come on the back of weaker-than-expected economic data and doubts that US President Donald Trump would deliver on the tax cuts and relaxed regulation he had promised, a package that traders had hoped would stimulate growth and inflation.

The dollar index, which measures the greenback against a basket of six other major currencies, hit a three-week low on Tuesday as 10-year treasury yields fell below 2.2% to their weakest levels since the US election results, and remained close to that level on Wednesday.

“What’s happening is that the market continues to price out the reflation trade in the United States,” said Societe Generale currency analyst Alvin Tan.

“There are greater doubts now about large-scale fiscal stimulus under the Trump administration, and on top of that the US inflation numbers have been disappointing.”

US treasury secretary Steven Mnuchin was quoted saying that Trump is “absolutely not” trying to talk down the strength of the US dollar in Wednesday’s edition of the Financial Times, playing down remarks by Trump in an interview last week when he said the dollar was “getting too strong”.

Sterling stayed less than a cent away from a peak of $1.2908 hit on Tuesday, the highest level since 3 October, after British Prime Minister Theresa May called a snap election for June, saying it would strengthen Britain’s hand in negotiations with the EU.

Tuesday’s 2.2% jump saw the pound shatter a months-old trading range. It also cleared the 200-day moving average for the first time since June, putting the squeeze on a raft of speculative short positions.

“Sterling is rallying on the view that May will have a stronger mandate, increasing her majority... To deal with Brexit negotiations and perhaps even calm the more extreme Brexiteers in her party,” wrote ING’s head of global markets research, Chris Turner, in a note to clients.

“We also think that poor positioning has played a major role, where sterling shorts were built in the $1.22/24 region in early March and are now being cut out.” Reuters

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