Dollar hits 16-month high, yen boosted by risk off sentiment

Irving Hamilton
November 14, 2018

Wall Street stocks reacted sharply to the oil price slump.

The rise in the euro and sterling led investors to take profits on the U.S. dollar, which retreated from a 16-month high.

Fears of a peak in corporate earnings growth, softening global demand and rising interest rates in the United States have put investors on edge in the past month.

Simon Derrick, head of currency research at Bank of New York Mellon pointed out that the pound's weakness against the dollar was "obviously related to the uncertainty over the weekend", but added: "At least half of it is actually about dollar strength and the expectation that the Federal Reserve will hike interest rates in December".

Hedge funds have resumed shorting the euro in recent weeks as expectations of a diverging trend in economic growth, and consequently interest rates have encouraged investors to borrow euros and invest the proceeds in US dollars.

Sterling leapt 1.4% to trade at $1.3036 against the dollar in afternoon trade, whilst against the euro it jumped to a near seven-month high of €1.1542.

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The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.20% to 97.19. The dollar has been preferred over the yen because of the diverging monetary policies of the Fed and the Bank of Japan, which is expected to keep retain its monetary policy ultra-loose for some time. It was the largest one-day percentage decline for the contract since September 2015.

Earlier, U.S. stocks rose after White House economic adviser Larry Kudlow said Washington had resumed trade talks with China, calling the development "very positive".

Neil Mellor, currency strategist at BNY Mellon, was also wary, warning Prime Minister Theresa May still had to convince party members as well as the Northern Irish Democratic Unionist Party (DUP), which props up her minority government.

With less than five months before Britain is due to leave the European Union on March 29, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and European Union member Ireland. The standoff between Rome and Brussels over Italy's free spending budget and wide fiscal deficit has put huge strain on the single currency, which has having lost 5.9 percent of its value over the last six months. Sterling bounced slightly from Monday's intraday lows after the European Unions chief Brexit negotiator said the main elements of an exit treaty text are ready to present to the British cabinet on Tuesday.

That raises the spectre of a banking crisis in the euro zone's third-biggest economy, lifting Italy's bond yield spread over Germany - the risk premium attached to Italian assets - back above the psychologically key 300 basis-point mark.

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