Dollar Declines for Fifth Day as Trump Concerns, Data Weigh

  • Political storm adds to headwinds facing legislative agenda
  • Euro gains versus all G-10 as political tensions subside

The dollar suffered a fifth day of losses, for its longest losing streak since late March, as concerns about President Trump sharing classified information with Russia collided with more positive sentiment toward the euro.

The greenback extended its decline Tuesday after weak April housing starts and building permits added to a string of soft economic data that have left investors questioning if the Federal Reserve will stick to its plan for two additional interest rate hikes this year. The greenback gained little solace from a report that showed April industrial production rose more than expected.

  • The dollar’s data-driven woes have been exacerbated by shifting expectations on fiscal stimulus as Trump faces strengthening headwinds in pushing legislation on health care and tax reform. An overnight report that the president shared classified information with Russian officials is seen as adding to challenges for the difficult legislative agenda
    • National Security Adviser H.R. McMaster said Trump didn’t compromise any source and wasn’t even briefed on sourcing and methods of information; Trump earlier said he has “the absolute right” to share information related to terrorism
  • As the dollar’s fortunes have shifted, so too has sentiment toward the euro. The political picture for the euro area is perceived as less uncertain after the completion of the French presidential race and the unexpected win by German chancellor Angela Merkel’s CDU party in a regional vote this past weekend. Still, both France and Germany face legislative elections in coming months
  • That shift in sentiment has driven the shared currency to its highest level since Nov. 9, while the dollar has retraced a large part of its post-election gain, extending losses below its 200-DMA
    • BMO strategists recommend going long EUR/USD, targeting 1.1800, while JPMorgan Asset Management’s Michael Bell said the pair could reach 1.1500 by year-end
  • In Tuesday trading, the greenback is lower vs all of its G-10 peers, with the steepest drops vs the Swiss franc, the Norwegian krone and the euro. The decline amounts to 0.6 percent as measured by the Bloomberg Dollar spot index, the biggest drop since April 24
  • The euro is higher vs the majority of its G-10 peers, gaining most vs the greenback and the New Zealand dollar as economic data in the euro area continue to improve, leading to speculation that the ECB will shift its language on monetary policy when it meets in June. While central bank officials have reiterated that QE will remain in place through the end of 2017, speculation is building that the bank will begin to consider tapering that assistance as the economy improves
  • EUR/USD traded near a fresh session high just under 1.1100, capping a three-day advance of nearly 2.2%, the largest rally over three days since early 2016. EUR gains are supported by firmer growth signs in the euro zone, relatively better stock market performance vs the U.S. as well as Trump issues weighing on the USD, said Shaun Osborne, chief foreign exchange strategist at Bank of Nova Scotia in Toronto. Further stop-loss buy orders are likely on a break above 1.1100, said traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
  • USD/CAD fell to a fresh low at 1.3575, the lowest since April 27, as the Canadian dollar played catch-up to other currencies. CAD gains in recent trading came as WTI remained near session low while UST yields pared drops; CAD move appears to be unwind of stale positioning amid USD declines elsewhere
    • WTI crude rose as high as $49.38/bbl before retracing gains to decline 0.3% to ~$48.69/bbl
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