Dollar Erases Weekly Drop as Euro Sinks on Dovish ECB Outlook

  • Tapering not discussed, inflation not compelling, Draghi Says
  • Long-term USD strength ‘important’: Treasury nominee Mnuchin

Evercore's Hyman: U.S. Economy Is Like a Bulldozer

The dollar recouped its losses for the week ahead of the Trump inauguration, supported by a rise in Treasury yields and a drop in the euro after ECB President Mario Draghi said “there are no convincing signs yet of an upward trend in inflation.”

Foreign exchange flows were “very light,” traders in London and Toronto said, throwing some doubt onto the significance of today’s moves. Traders said that dollar demand came from leveraged investors, hedge funds and model-driven players, though many were cautious about building sizable positions ahead of the inauguration, where further details on fiscal policy may emerge. Those investors were said to be rebuilding dollar longs or adding to existing positions.

Dollar gains were underpinned by a rise in Treasury yields that followed U.S. data showing stronger-than-expected readings on housing starts and the Philadelphia Fed business outlook, along with a drop in weekly jobless claims to the lowest since the 1970s. The dollar also gained a slight lift after Treasury Secretary nominee Steven Mnuchin said that the long-term strength of the USD is important.

At the same time, euro longs were unwinding after Draghi reiterated that the bank had not discussed tapering its asset purchases. Earlier this week, the euro rose as some traders expressed concern that the recent uptick in euro area economic data may have sparked a taper discussion at the ECB.

  • EUR/USD trading at ~1.0627 vs session low 1.0589 after filling bids ahead of 1.0600; EUR found tech support ahead of the 1.0580 low from Monday and losses were pared
  • The dollar is mixed vs its G-10 peers after losing ground vs most earlier in the day; dollar remains up ~0.2% as measured by the Bloomberg dollar index after gaining as much as 0.4%, with gains paced by a ~0.5% rise vs JPY as the dollar snaps back strongly from a weekly low near 112.60
  • USD/JPY stalled near resistance from the Jan. 12 high 115.51, breach may allow progress toward the Jan. 11 high at 116.87
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