Dollar Drops for Third Week as Data Underscore Fed Dilemma

Updated on
  • Greenback falls as GDP, ECI miss ests., health care shelved
  • Swiss franc and yen extend declines on policy comparisons

UBS' Haefele Sees U.S. Dollar Weakening From Here

The dollar was headed for a third straight week of losses as data reinforcing the notion that U.S. inflation pressures are subdued kept the greenback close to a 14-month low.

U.S. economic growth and the employment cost index both missed estimates, while inflation expectations remained muted as the University of Michigan consumer sentiment reading improved in July. The dollar fell further after North Korea launched an intercontinental ballistic missile, extending losses seen after the GDP data and after Republican efforts to repeal Obamacare failed.

  • The Bloomberg dollar index is lower by ~0.3% for the day amid month-end selling pressure and is on track for a weekly decline of a similar magnitude. The dollar is trading close to levels from early May 2016. Flows are muted after a hectic week that saw the euro gain about 0.7% vs the greenback and more than 3% vs the Swiss franc
  • Investors continue to adjust positions amid shifting expectations for monetary-policy trajectories among the major central banks. Data Friday showed robust economic growth in some European economies and stronger inflation pressure in Germany. The reports underscored ECB President Draghi’s assertion that the regional economy is on a firm footing with reduced downside risk that should enable policy makers to begin discussions soon on tapering asset purchases
  • In the U.S., the data amplified the Fed’s decision Wednesday to acknowledge the persistence of subdued inflation pressures, even as employment continues to climb. While the Fed has raised rates twice this year, markets assign less than 50% odds of a third hike for 2017. In contrast, both the SNB and the BOJ have signaled that their policies will remain on hold for the foreseeable future, the SNB also emphasizing that its currency remains overvalued. As a result, the Swiss franc tumbled vs its G-10 peers on the week; the yen dropped by a smaller amount vs most while gaining against the CHF and the USD
  • In Friday trading, EUR/USD was trading ~1.1748 vs a high of 1.1764. It was still below the more-than-two-year peak at 1.1777 reached Thursday that offers nearby technical resistance
  • USD/JPY was trading ~110.79 after dropping to a fresh low for the day at 110.67 following the North Korea missile launch. The pair tested technical support in the zone below 110.80 that cushioned during the week as the dollar fell with Treasury yields. The 233-DMA at 110.78 also cushioned the pair in recent sessions and may have added to support Friday, one trader said
  • Adding to the greenback’s woes, USD/CAD saw its biggest drop in two weeks to a low of 1.2420, after oil gained and Canadian GDP beat all estimates. The data reinforced expectations that the Bank of Canada will hike again in October after raising rates 25bps on July 12
  • The Swiss franc extended its weekly drop versus the euro and the dollar, with EUR/CHF rising above 1.1400 in late afternoon. Traders speculate that some M&A-related CHF selling may have exacerbated the drop in the Swiss currency in recent sessions
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