Weekly Market Outlook

Dollar slips after Fed, Aussie soars on record trade surplus

© Reuters. FILE PHOTO - A money changer counts U.S. dollar bills, with Turkish lira banknotes in the background, at an currency exchange office in central IstanbulThe dollar slipped to its lowest levels since mid-November on Thursday after the Federal Reserve disappointed investors hoping for a more hawkish policy stance, while the Australian dollar rallied after data showing a record trade surplus.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, slipped 0.2 percent to 99.457 (DXY), after earlier dropping as low as 99.427, its lowest since Nov. 14.

Against the yen, the dollar skidded 0.6 percent to 112.62 <jpy=>, moving closer to Tuesday’s low of 112.08, while the euro added 0.2 percent to $1.0793.

The yen extended gains and touched its session high as the 10-year Japanese government bond yield rose to 0.115 percent, its highest since January 2016, following slack demand at an auction of the maturity. [JP/]

“We’re still seeing long-term guys buying the dollar on dips, expecting it to eventually recover on interest rate differentials between Japan and the U.S.,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

“But sometimes, it’s a short-term market.”

The Fed on Wednesday presented a relatively upbeat view of the U.S. economy at its first meeting since President Donald Trump took office, though the dollar came off session highs overnight when policymakers noted some market-based measures of inflation were still low.

While the Fed refrained from giving any explicit rate-hike signals or the timing of its next move, it said job gains remained solid, inflation had increased and economic confidence was rising.

But its relatively brighter view came against a backdrop of concern about the potential impact of Trump’s protectionist stance, as well as his recent comments about currencies.

On Tuesday, Trump and a top adviser strongly criticized Japan, China and Germany, claiming they had all devalued their currencies to benefit their own countries.

“As the U.S. economy accelerates, some believe it can tolerate a stronger dollar, but I don’t think that’s true. I don’t think the U.S. government will tolerate it,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

While the dollar initially rallied after Trump’s election as markets seized upon his promises for stimulus steps, tax reform and deregulation, it has tended to slump whenever he has talked about withdrawing from international trade agreements.

“It’s still a tug-of-war between protectionism and stimulus hopes,” Yamamoto said.

Data on Wednesday reinforced views of economic improvement. U.S. factory activity accelerated to more than a two-year high last month.

The ADP National Employment Report also showed private employers added 246,000 jobs in January, up from 151,000 in December.

The nonfarm payrolls report on Friday is expected to show employers added 175,000 jobs last month, according to the median of 102 economists polled by Reuters.

The Fed has forecast three rate increases in 2017. While economic improvement would prompt it to raise interest rates, the market is pricing in less than a 50 percent chance of a hike until the Fed’s June meeting, according to the CME Group’s FedWatch Tool.

“If the Fed does move in March, we could see as many as four hikes in 2017, and as long as data remains supportive, very likely three hikes,” BlackRock Inc’s (N:BLK) chief investment officer of global fixed income Rick Rieder said in a note.

The Aussie, meanwhile, surged 0.7 percent to $0.7639, after earlier scaling $0.7651, its loftiest peak since November 2016.

Data from the Australian Bureau of Statistics showed a trade surplus of A$3.51 billion ($2.68 billion) in December, handily outpacing forecasts of A$2.2 billion, as surging commodity prices showered the resource-rich nation in cash.