The dollar suffered broad losses Thursday, extending a 2017 retreat after the Federal Reserve signalled it would raise interest rates more slowly than some investors had come to expect.
With the dollar losing ground against the euro, yen and several emerging market currencies, The Wall Street Journal Dollar Index sank to its lowest level since early February. Gold futures notched their biggest daily gain in 10 months, as some traders wagered the Fed risks letting inflation perk up beyond its 2% target.
The movement marked the latest setback for investors who expected the dollar would rise this year as the Fed stepped up the pace of rate increases. A stronger dollar has become a popular trade on Wall Street even after a significant period of U.S. currency appreciation, reflecting in part the widespread investor expectation that the Trump administration will enact policies that boost U.S. growth and limit trade. But when these expectations wane, sharp retreats can ensue.
“This looks to be more about positioning than a change in direction,” said Christian Lawrence, senior market strategist at Rabobank.
Thursday’s drop left the WSJ Dollar Index down 2.5% for the year, even after the Fed on Wednesday raised its fed funds rate to a range of 0.75% to 1%. Higher rates tend to buoy the dollar by making it more attractive to yield-seeking investors.
The retreat is an acute surprise for those betting on a dollar revival because many saw signs earlier this month that the Fed was turning hawkish. A fresh round of solid U.S. economic data and comments from Fed speakers that pointed to a March rate increase—three months earlier than the consensus expectation heading into this month—lifted the dollar for the first two weeks of March.
But the central bank’s policy statement Wednesday was deemed by many analysts to be in keeping with the Fed’s cautious tone throughout the postcrisis period. The central bank has raised rates only once in each of the past three years, after leaving them on hold for years.
The market is also weighing if the White House can make good on its fiscal stimulus plan of a new tax regime, business deregulation and infrastructure spending.
Analysts say that one proposed change to tax policy, which incentivizes U.S. companies to bring back cash held abroad, would likely give the dollar a short-term boost even if the economy slows or interest rates don’t rise quickly.
Treasury Secretary Steven Mnuchin has laid out plans to overhaul the tax code by August. But questions remain about whether Congress will get behind the plan, and President Donald Trump has focused more on immigration and other issues at the start of his term.
The WSJ Dollar Index closed down 0.2% at 90.65, its lowest level since Feb. 8. The dollar touched 19.05 against the Mexican peso, a four-month low. It also declined against the Turkish lira and the Russian ruble. Gold for March delivery closed up 2.2% at $1,226.50 a troy ounce, the biggest rise since last June.
The euro rose to $1.0768, its highest level since Feb. 3. The currency has lost about 4% of its value against the dollar since October, when markets started betting on tighter monetary policy in the U.S.
The yearslong move higher by the U.S. dollar has left it looking expensive, some analysts said. One gauge of a currency’s value is its real effective exchange rate, or REER, which measures a country’s exchange rate against several trading partners, adjusted for inflation.
The dollar’s REER is currently higher than both its five- and 10-year averages, according to the Bank for International Settlements. While currencies can trade above and below their long-run valuations for extended periods, it underscores the extent of the dollar’s rally.
The real effective exchange rates for both the euro and yen are below their five- and 10-year averages, suggesting they are cheap.
Yet with U.S. economic growth picking up and the Fed indicating more rate increases this year, many believe the dollar can resume a rally that sent it to a 14-year high in January.
U.S. single-family housing starts in February hit their highest level since the recession thanks in part to a strengthening economy, Commerce Department data showed Thursday.
Meanwhile, the number of Americans applying for unemployment benefits fell last week and continued to hover at a low level consistent with a healthy U.S. labor market. Jobless claims have remained below 300,000 for 106 consecutive weeks, the longest such streak since 1970.
Europe and Japan have had upside surprises recently in their economic data as well, but many investors see demographics and debt dynamics in those regions as more challenging than in the U.S., making dollar assets the most attractive option.
“Investors are likely to see this decline as a buying opportunity,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
Article by Ira Iosebashvili via WSJ