Dollar's Winning Streak Pauses; U.S.-Turkey Spat Pummels Lira

  • UBS Wealth Management expects lira weakness in long term
  • Pound climbs on jobs data, speculation about minister demotion

U.S. Signals Turkey Crisis Could Continue

The dollar paused from its longest winning streak in a year, leaving the Bloomberg Dollar Spot Index little changed, as the pound and euro gained on thin volume with U.S. bond markets closed for Columbus Day.

The U.S. currency was underpinned by weakness in emerging markets led by Turkey, with Brazil and Mexico also contributing. A diplomatic feud between the U.S. and Turkey sparked a lira selloff of more than 3 percent, which spread across emerging-market exchange rates. The dollar index has risen for four straight weeks amid rising odds of another Fed rate increase this year.

  • USD/TRY reached 3.8533 against the dollar, the highest since January, after the two nations stopped issuing visas for each other’s citizens in a spat related to last year’s failed coup against President Erdogan. There’s potential for Turkey’s currency to recover in the coming days and weeks as the situation gets resolved, said Michael Bolliger, head of emerging-market asset allocation at UBS Wealth Management’s chief investment office in Zurich
    • Longer-term, he expects TRY to depreciate because of Turkey’s current account deficit, elevated inflation and a central bank that’s likely to turn more dovish
  • USD/BRL rose 0.9% to 3.184, while USD/MXN climbed 0.5% to 18.6292, highest since June
  • GBP/USD rose 0.7 percent to 1.3155, rebounding from Friday’s drop to a one-month low. Pound was lifted by U.K. employment data, which fanned speculation that the Bank of England may begin to raise rates at a quicker pace. It also received a boost from reports suggesting that Prime Minister Theresa May may demote her rebellious Foreign Secretary Boris Johnson
  • EUR/USD rose to a fresh high driven by EUR/GBP flows after release of Brexit white paper and by ECB Lautenschlaeger’s remark that ECB should scale back QE by start of 2018
  • USD/JPY is little changed on the day amid moderate EUR/JPY buying and GBP/JPY option activity. Still, spot remains below the Ichimoku conversion line for only the second time since mid-September as momentum stalls

— With assistance by Robert Fullem

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