Dollar Set for First Yearly Loss Since 2012 as Euro Pads Gains

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Oanda's Innes Says Lack of Inflation Weighs on Dollar

The dollar dropped for a second day and headed for its steepest annual decline in more than a decade as late-year portfolio adjustments added to the greenback’s woes.

  • The U.S. currency lost ground Thursday as year-end funding pressures abated and amid weight from dollar-negative portfolio rebalancing flows that will continue into Friday; 2018 may get off to a slow start as the market adjusts to new regulations and sets up for key U.S. data, traders said
  • The Bloomberg dollar index is on track for its first yearly loss since 2012 with a decline of ~8.2%, though it has pared its drop from the more than 10% seen early in September; the index fell as much as 0.4% Thursday
  • The dollar had surged to a 14-year high on Jan. 3, including a 2017 low for EUR/USD at 1.0341
  • The euro subsequently scored annual gains vs all of its G-10 peers and is now up more than 13% YTD vs the greenback, its biggest advance since 2003; EUR is the largest G-10 gainer against the USD this year
  • Next year may begin on a cautious note, two London traders said, citing holidays in Japan, the introduction of a new regulatory regime and the December U.S. employment report set for Jan. 5
    • Europe’s MiFID II rules come into effect on Jan. 3, and while some firms have already adapted to the procedures, many are not yet fully familiar with the new processes and reporting requirements, suggesting that trading may not get up to speed straight away, the traders said
  • The dollar was lower vs the entire G-10 sector Thursday amid the choppy price action, sparse liquidity and low risk appetite that is typical at year-end; the Swiss franc, the euro and the Canadian dollar all recorded gains of ~0.5% or more vs the dollar in the session; USD/CHF briefly fell below its 100-DMA for the first time since late September
  • While some rebalancing flows were completed Thursday, others remain to be filled at Friday’s 4pm London fixing; those flows could make for wide price swings and difficult trading conditions as markets wind down for the year and liquidity evaporates, a trader said
    • Foreign exchange futures in the U.S. will observe an abbreviated trading schedule Friday and Sifma has recommended a 2pm ET close for the cash bond market
  • EUR/USD was close to its session high at 1.1959 seen in recent trading, with the pair approaching the late November peak at 1.1961 that may offer technical resistance 
    • Breach of that November high may allow EUR to advance toward its 2017 peak at 1.2092 reached in September; gains above 1.2000 have previously attracted the attention of ECB officials who have signaled their intent to stay the course on quantitative easing until inflation picks up toward their “near, but below 2%” target. A stronger euro would add to the inflation challenge
    • Italy’s president dissolved Parliament, paving the way for a general election as early as March 4
  • USD/JPY was trading at ~112.88 vs session low at 112.67; the pair fell below 113.00, where large option strikes rolling off Thursday had been expected to provide some support
    • The pair rebounded modestly after testing tech support from the Ichimoku cloud top at 112.70
  • The Canadian, Australian and New Zealand dollars all notched two-month highs vs the USD as the Bloomberg commodity index rose for an 11th day, its best string of advances since 2005; 3-month copper futures touched the highest since January 2014
  • The Czech koruna rose ~2% vs USD, leading gains against the dollar in the emerging-market FX space, where the greenback lost ground against a majority of peers; the laggard was the Argentine peso, which fell as much as 4% vs the dollar in its biggest decline since 2015, after the central bank cut its inflation target, signaling rate cuts may be imminent
  • Some information comes from foreign-exchange traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
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