Dollar Reverses Drop as Portfolios Rebalanced at End of Month

  • Trump speech seen as binary risk for dollar, too hard to call
  • Japanese yen gains against major peers, testing key levels

Why Markets Should Be Ready for a Fed Rate Hike

The dollar pared losses to trade little changed after dropping to a fresh low as month-end portfolio rebalancing flows emerged almost on cue around the London fixing and as traders pared risk exposure ahead of President Trump’s speech.

With dollar selling expected as rebalancing got underway, the greenback fell to its low for the session just ahead of the 4 p.m. London fixing (11 a.m. ET), only to snap back quickly as the selling ran its course and dollar short-covering kicked in. The dollar traded near its high of the morning at the official fixing time, before extending its rebound in the afternoon.

  • For the dollar, the president’s speech is seen as a hard call, prompting traders to trim exposure, perhaps to build fresh positions after the speech. Traders say anything that points to delays to fiscal stimulus may weigh on the dollar, such as linking tax cuts to health care reform, as signaled Monday. Conversely, measures that accelerate stimulus may support, as they would be seen as raising the odds or speed of Fed rate hikes. Market-implied odds of a March rate rise are at ~54% after dropping below 50% earlier in the day.
  • USD/JPY fell as low as 111.69 in afternoon trading, breaching its 100-day moving average at 111.90, before recovering to above 112.00. The yen gained broadly, with strongest advances vs the CAD and the GBP; the latter pair tested technical support from the converged 100/200-DMAs ~138.87. The yen has seen buying related to European bond redemptions by Japanese accounts, along with dollar selling by Japanese exporters tidying up their books at month-end, a trader in London said
  • With the Japanese fiscal year-end on March 31, the yen may see further demand in the weeks ahead, that trader said
  • EUR/USD is trading near 1.0600 vs session high 1.0630 reached after filling offers ahead of 1.0610; EUR was capped by technical resistance in the 1.0630/35 zone that includes the Monday high as well as the peaks from last week; stop-loss buy orders are positioned above that zone and above 1.0650, traders in Europe and London said
  • Data released Tuesday showed fourth-quarter GDP second est. 1.9% vs. est. 2.1%; price data was revised downward, though personal consumption showed a healthy upward revision; other data showed an unexpected decline in business inventories along with a gain in consumer confidence to highest since July 2001
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