Dollar Posts First Monthly Gain Since Feb. Amid Fed Chair Talk

  • Trading turns choppy on rebalancing flows, Warsh speculation
  • Fed seen on track for December hike despite PCE deflator miss

The dollar was on its way to a third straight weekly advance and its first monthly gain since February after shrugging off month-end flows.

The Bloomberg Dollar Spot index was ending a choppy day with a modest loss even as the dollar gained versus seven of its G-10 peers despite soft inflation data. The greenback relinquished gains seen after a report that former Federal Reserve Governor Kevin Warsh met with President Trump about the Fed chair position. Next week brings another flurry of Fed speakers. Janet Yellen, whose term as chair of the central bank expires next year, will open a community banking conference, which may not lead to commentary on monetary policy.

  • Earlier dollar gains were tempered after a round of selling for month-end portfolio rebalancing emerged at the 4pm London fixing, as had been forecast by analysts. The dollar had fallen to a session low seen in morning trading after a below-estimate reading on the Fed’s preferred inflation gauge, though there was little impact on market expectations for a December rate hike
  • The dollar was still up more than 1% for the week, after Yellen on Tuesday signaled that the Fed is likely to stay the course and raise interest rates in December, even as inflation remains below the central bank’s objective. The dollar is headed for a monthly gain of ~0.7 percent. It remains down almost 2 percent for the quarter, its third quarterly loss and the longest losing streak since 2011
  • Trump and Treasury Secretary Steven Mnuchin met Thursday with Warsh, who is seen as more hawkish than Yellen. Other people Trump is said to be considering for Fed chair include Yellen, whose term as chair expires in February; Stanford economist John Taylor; former BB&T Corp. CEO John Allison; and Columbia University economist Glenn Hubbard. Trump has said he’s also considering White House National Economic Council Director Gary Cohn 
  • In Friday trading, USD/CAD was around 1.2470 after earlier rising to a fresh high for the day at 1.2532. The loonie was weighed down after Canadian July GDP was flat m/m vs estimates for a gain of 0.1%. That data further damped expectations for another BOC rate hike in 2017 after Poloz this week said the central bank would be data-dependent and cautious about raising rates further
  • USD/JPY was trading around 112.50 after rising to a fresh daily high following the Warsh report at 112.74, barely eclipsing the interim high at 112.73. Earlier, the pair fell to a daily low at 112.22 after the disappointing PCE data, leaving USD shorts to scramble for cover amid the snapback that triggered stop-loss buy orders on the return above 112.50, according to a trader in New York
  • EUR/USD was trading at about 1.1820 vs a daily range of 1.1773/1.1833, with the session high seen after the inflation report. EUR/USD trading was choppy as cross flows clouded the outlook; EUR scored strong gains vs the pound and the Swedish krona, while also rising vs most other G-10 peers
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