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Dollar’s smile makes Wall Street frown: McGeever

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Dollar's smile makes Wall Street frown: McGeever
© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

By Jamie McGeever

ORLANDO, Florida (Reuters) -The ‘dollar smile’ can be a blessing for Wall Street, or a curse.

Right now, with the dollar’s boom being driven by a destabilizing surge in U.S. bond yields, heightened uncertainty over global growth and rapidly deteriorating investor sentiment, it is definitely the latter.

The gist of the ‘dollar smile’ theory, floated by currency analyst and now hedge fund manager Stephen Jen 20 years ago, is this: the dollar typically appreciates in good times (booming investor confidence and roaring markets) and bad (times of great financial stress and ‘risk off’ markets), but sags in between.

U.S. economic outperformance in a solid global expansion attracting strong investment inflows into U.S. assets, and Treasury yields higher than their international peers is a recipe for strong dollar and buoyant Wall Street.

The circumstances that have fostered the dollar’s rapid rise since July could not be more different.

The Chinese, European and many emerging economies are creaking, fears are growing that aggressive Fed policy will ‘break’ something at home, and the explosion in real yields has left Wall Street – especially growth and tech stocks – shrouded in a mushroom cloud of worry and uncertainty.

In terms of the ‘dollar smile’, these are ‘bad’ times. There is a growing sense in markets that the negative relationship between U.S. stocks, the dollar, and yields could persist for months.

“I expect it to remain negative for the foreseeable future, that is the next three to six months,” reckons Stuart Kaiser, head of U.S. equity trading strategy at Citi. “This is a risk-off environment.”

Kaiser reckons returns have fallen by around 7.5% over the last two months. The dollar has accounted for 3.3 percentage points of that and the 10-year real yield 2.1 pp, easily the two biggest contributors, he estimates.

The dollar is up around 7% since mid-July and is on course to register its 11th consecutive weekly gain. That would be a record winning streak since the era of free-floating currencies began over 50 years ago.

It has had bouts of stronger appreciation, such as the early 1980s and 2014-15, but never a more consistent move higher. And with U.S. bond yields the highest in years and still outpacing their global peers, it may not be over yet.

FINANCIAL CONDITIONS TIGHTEN

A stronger dollar and rising bond yields, especially inflation-adjusted ‘real yields,’ in a “risk off” investment climate can scare the horses on Wall Street, potentially feeding a self-fulfilling spiral of selling and de-risking.

There’s no suggestion equities are about to crash. But the speed and extent of the move in the dollar and Treasuries, and tightening of financial conditions, warrant vigilance.

According to Goldman Sachs, U.S. financial conditions are the tightest this year. This is not dissimilar to other major economies and regions, some of which – the euro zone, China and emerging markets – are feeling an even tighter squeeze.

The bank’s U.S. financial conditions index (FCI) has risen 95 basis points since mid-July and the breakdown highlights how the dollar, yields and equities are feeding off each other.

Compare that with the 100 bps rise in the global FCI or 145 bps jump in the emerging market FCI from their lows on July 25, which have been driven almost entirely by higher short and long rates. The FX impact, positive or negative, has been negligible.

As Rabobank’s Jane Foley notes, the dollar’s historical inverse correlation with emerging market stocks – a decent barometer of risk appetite – is “reasonably” strong.

“This suggests that the dollar is set to find support on safe-haven demand even as the U.S. economy slows,” Foley wrote on Thursday.

If these dynamics intensify and momentum builds up a head of steam, the dollar’s strong exchange rate could also start to erode the dollar value of U.S. firms’ overseas income, potentially having a material impact on corporate earnings.

It might be too early for that to appear in third-quarter results – many big Wall Street firms will have hedged their currency exposure over the near term – but if sustained, fourth-quarter profits could be affected.

There might be less cause for concern in corporate America, especially the growth-sensitive and tech sectors that led the rally in the first half of the year, if the dollar’s surge was happening in a relatively stable fixed-income environment.

But nominal and inflation-adjusted long-term bond yields have rocketed, threatening future cash flows and profits. Another reason for investors to be cautious.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Andrea Ricci)

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Dollar on back foot; euro awaits key inflation release

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Investing.com – The US dollar slipped lower Tuesday, heading towards a one-week low following a report that President-elect Donald Trump’s tariffs could be less aggressive, while the euro gains ahead of key inflation data.

At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 107.775, after falling overnight to its weakest since Dec. 30.

Dollar remains on backfoot

The dollar has been on the backfoot since the Washington Post released a report on Monday stating that the new Trump administration was exploring plans to limit tariffs to sectors seen as critical to US national or economic security.

President-elect Donald Trump has denied the report in a post on his Truth Social platform, but the dollar has still struggled to make headway.

“The dollar’s failure to recover all its intraday losses on Monday likely indicates two factors: first, the market had been heavily favoring the dollar following a nearly continuous three-month rally; second, a view that there is no smoke without fire and that the contents of that Washington Post report sounded sensible,” said analysts at ING, in a note.

There is a lot of US economic data to digest Tuesday, including for December and the November , ahead of Friday’s release of the closely watched for further clarity on the health of the world’s largest economy.

“It is unlikely investors will want to consider actively selling the dollar ahead of Trump’s inauguration on 20 January on speculation over softer tariffs – but we could see a little more rebalancing of FX positioning and a little more dollar consolidation in the interim,” ING added.

Euro climbs ahead of inflation data

In Europe, rose 0.4% to 1.0431, climbing once more after jumping to a one-week high on Monday.

Attention turns Tuesday to the release of the latest inflation data out of the eurozone – the last data on regional prices before the European Central Bank’s next meeting on Jan. 30. 

The for December is expected to have risen 2.4% in December on an annual basis, speeding up from 2.2% in November.

However, data released from Spain and Germany showed faster-than-expected pickups in inflation, while France surprised to the downside.

Investors are currently looking for the ECB to ease interest rates by around 100 basis points in the first half of 2025, and any signs that inflation is easing further would give the ECB scope to loosen policy more, weighing on the single currency.

traded 0.4% higher to 1.2569, following sharp gains overnight, despite data showing British house prices dropped unexpectedly last month for the first time since March.

Mortgage lender Halifax said fell 0.2% in December after a 1.2% rise in November, and were 3.3% higher on the year – lower than the 4.2% expected.

The held interest rates unchanged last month after consumer prices rose above target, and is expected to proceed cautiously with further rate cuts this year.

Yuan remains weak

In Asia, rose 0.1% to 7.3325, with the Chinese currency continuing to underperform, hitting its weakest level in 17 years on Monday.

While the currency did recover some ground, it remained fragile, with new US. restrictions against Chinese companies adding more pressure on the currency. 

slipped slightly to 157.56, after earlier hitting its highest level in nearly six months.

 

 

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Asia FX muted as markets weigh Trump tariffs, dollar hovers above 1-wk low

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Investing.com– Most Asian currencies moved in a tight range on Tuesday as traders gauged the potential for less strict trade tariffs under incoming U.S. President Donald Trump, while the dollar steadied from some overnight losses. 

The Chinese yuan continued to severely lag its peers after its onshore pair hit its weakest level in 17 years on Monday. While the currency did recover some ground, it remained fragile, with new U.S. restrictions against Chinese companies adding more pressure on the currency. 

The dollar also steadied after recouping a bulk of its overnight losses, as a recent report sparked increased speculation over just what Trump’s tariff plans will entail. 

The Japanese yen’s pair rose 0.4% and hit its highest level in nearly six months, while the Australian dollar’s rose 0.2%. Australian data for November is due on Wednesday. 

The South Korean won’s pair fell slightly, while the Indian rupee’s pair steadied after recovering sharply from record highs above 86 rupees. 

Dollar steadies above 1-week low amid tariff speculation

The and rose slightly in Asian trade, recovering from a one-week low hit on Monday. 

The greenback recouped a bulk of its Monday losses after Trump denied a Washington Post report that his administration will impose less strict trade tariffs than initially promised. 

Trump- who is set to take office in less than two weeks- has vowed to impose steep import tariffs against China and other major economies, raising concerns over a renewed global trade war. 

The prospect of more tariffs was a key driver of the dollar’s recent rally, as was growing confidence that the Federal Reserve will cut interest rates at a slower pace in 2025. Hawkish comments from Fed officials furthered this notion over the weekend. 

Focus this week is now on key data for December, due on Friday, for more cues on the U.S. economy and labor market. 

Chinese yuan fragile amid US trade jitters 

The Chinese yuan was the worst-performing Asian currency this week, having touched its weakest level in 17 years on Monday.

The yuan’s onshore pair rose 0.3% on Tuesday, with the Chinese currency remaining fragile in the prospect of more U.S. trade headwinds.

The U.S. on Tuesday added technology giants Tencent Holdings Ltd (HK:) and Contemporary Amperex Technology (SZ:) to a blacklist of companies with ties to the Chinese military, threatening to further strain ties between the world’s largest economies. 

Beijing is expected to dole out even more stimulus measures in the face of a renewed trade war with the U.S.

Focus this week is on , due on Thursday, for more cues on Asia’s biggest economy, as it struggles to shore up growth.

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Dollar down in choppy trade on Trump tariff confusion

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By Chuck Mikolajczak

NEW YORK (Reuters) -The U.S. dollar was lower on Monday in choppy trading after conflicting reports about how aggressive President-elect Donald Trump’s tariff plans could be when he takes office.  

The dollar dropped as much as 1.07% on the session against a basket of major currencies after the Washington Post reported that Trump’s aides were exploring plans that would apply tariffs to every country – but only on sectors seen as critical to U.S. national or economic security, easing concerns about harsher and wider levies.

The dollar then sharply pared declines after Trump denied the report in a post on his Truth Social platform. 

“The reality here is that Trump’s Truth Social views are going to drive FX volatility for a while and (Monday) morning’s reaction is indicative of the underlying dynamics,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“The market consensus is that Trump’s bark will be worse than his bite, and any news that confirms that concept is fuel for rallying in risk assets and for a decline in the dollar and Treasury yields, but the reality here is that the downside risks remain and there’s no clear endpoint for that,” Schamotta added.

The , which measures the greenback against a basket of currencies, fell 0.64% to 108.26, with the euro up 0.76% at $1.0386. The dollar was on pace for its biggest daily percentage drop since Nov. 27 with the euro poised for its biggest daily gain since Aug. 2.

The dollar index had reached a two-year high of 109.54 last week en route to its fifth straight weekly gain, as the resilient economy, the potential for higher inflation from tariffs and a slower pace of rate cuts from the Federal Reserve have buttressed the greenback. 

The strengthened 0.16% against the greenback to 7.348 per dollar. The dollar reached a 26-month high against the currency last week as China is seen as one of Trump’s major tariff targets. 

Also helping the dollar pare declines were comments from Fed Governor Lisa Cook, who said the Fed can afford to be cautious with any further rate cuts given an economy that is on solid footing and inflation that has been stickier than expected. 

Various Fed policymakers are scheduled to speak this week, and are likely to echo recent comments from other Fed officials that there remains a need to combat the stubborn levels of inflation.

The euro, which hit its lowest level since November 2022 last week, strengthened after annual German inflation rose more than forecast in December, according to preliminary data. 

“There’s a window there for potentially 2%, 3% or 4% correction in the dollar index that could unfold in the next while, but we’d need either a stronger sense that either the European economy’s doing a bit better, so we see a further pick up in European interest rates, or some further moderation in expectations regarding tariffs to drive that,” said Shaun Osborne, chief FX strategist at Scotiabank (TSX:) in Toronto.

U.S. economic data showed new orders for U.S.-manufactured goods fell in November while business spending on equipment appeared to have slowed in the fourth quarter.

Against the Japanese yen, the dollar firmed 0.17% to 157.53 while sterling strengthened 0.72% to $1.251.

© Reuters. FILE PHOTO: A bank employee counts U.S. dollar notes at a Kasikornbank in Bangkok, Thailand, January 26, 2023. REUTERS/Athit Perawongmetha/File Photo

Investors will gauge a string of data on the U.S. labor market this week, culminating in Friday’s key government payrolls report. 

The Canadian dollar strengthened 0.74% versus the greenback to C$1.43 per dollar after Canadian Prime Minister Justin Trudeau said he would step down as leader of the ruling Liberals in the coming month. 

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