Dollar Increases Gains Against Other Currencies

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The dollar extended gains against the other major currencies on Monday, pulling away from nine-month lows, but the greenback’s upside was expected to stay limited amid expectations for tighter monetary policy by major central banks.

The euro dropped against the dollar 0.51% to 1.1369, off Friday’s 13-month peak of 1.1448, while the sterling declined 0.47% to 1.2967, pulling away from last week’s six-week high of 1.3032.

The dollar index against a group of six major currencies was 0.50% higher at 95.86, crawling off a nine-month trough of 95.470 plumbed on Friday.

In last week’s comments, the heads of the European Central Bank, the Bank of England and the Bank of Canada embraced a more aggressive view on monetary policy, indicating that they were getting ready to join the Federal Reserve in policy tightening.

Aggressive signals from foreign central banks contrasted with doubts over whether the Fed will be able to carry out hike rates again this year given a recent batch of weak U.S. economic data and growing skepticism that the Trump administration will be able to deliver on its pro-growth agenda.

Elsewhere, the greenback rallied against the yen and swiss franc 0.55% to 113.04 and 0.50% to trade at 0.9626, respectively. Meanwhile, the aussie dollar and kiwi were weaker against the dollar, down 0.44% to 0.7656 and 0.55% to 0.7292, respectively.

The yen briefly rose after Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party suffered an historic defeat in an election in Tokyo on Sunday, in a vote that could be a harbinger for national elections.

“The Tokyo election won’t have a strong market impact, in my view, as there are no opposition parties in Japan that can immediately replace the (ruling) LDP,” said Yukio Ishizuki, a senior currency strategist.

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Euro Rallies Amid Political Worries over Several European Countries

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The European currency surged back after weakening against the dollar earlier amid political worries over Greece, Italy and Britain as European geopolitical fears weakened risk appetite.

EUR/USD was up 0.20% to $1.1186 by 10:29 ET, after falling as low as 1.1108.

The single currency came under pressure in early trade as worries over Greece’s bailout, the prospect of an early Italian general election and European Central Bank President Mario Draghi’s comments about the need for continued stimulus all weighed.

James Woods, a global investment analyst in Sydney, attributed most of the currency’s decline on Tuesday, saying Athens may opt out of its next bailout payment if creditors cannot get a debt relief deal done.

“The bailout payments are necessary to meet existing debt repayments due in July, so if Greece were to forgo this bailout payment the probability of a default would spike, reopening the discussion around a Grexit from the Euro zone,” Woods said.

However, he warned against reading “too much into it” without more details or confirmation, adding it was doubtful Greece would forgo the bailout payment at this stage.

Euro zone finance ministers failed to agree with the International Monetary Fund on Greek debt relief or to release new loans to Athens last week, but did come close enough to intend to do both at their June meeting.

Comments by former Italian Prime Minister Matteo Renzi on Sunday in favor of holding an election at the same time as Germany’s in September also raised uncertainty and pulled the euro lower earlier.

So did a statement by European Central Bank President Mario Draghi reiterating the need for “substantial” stimulus given subdued inflation.

Meanwhile, sterling pushed higher, rising 0.3% to $1.2877, despite British Prime Minister Theresa May’s lead over the opposition Labor Party dropped to as low as 5-6 percentage points in the latest poll to show a tightening race since the Manchester bombing and a U-turn over social care plans,  which adds to political risk around Brexit as well.

Recent polls have indicated that Prime Minister Theresa May’s Conservative Party has less of a lead over the Labor Party than expected.

The pound was also higher against the euro, with EUR/GBP down 0.09% at 0.8703.

Moreover, the greenback index was at 97.23, off the day’s highs of 97.67 as the firmer euro weighed up.

Last week the index plumbed lows of 96.79, its weakest level since November 9 amid uncertainties over the Trump administration.

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Greenback Nudges Up on U.S. yields, Euro Retreats From One Month Peak

On Tuesday, the greenback edged up against a basket of currencies as U.S. Treasury yields extended their increase in advance of an expected interest rate increase by the Fed Reserve.

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On Tuesday, the greenback edged up against a basket of currencies as U.S. Treasury yields extended their increase in advance of an expected interest rate increase by the Fed Reserve.

The euro pulled back from one month peaks after dovish sounding remarks from European Central Bank officials tempered its recent increase.

With a rate increase already perceived as a done deal, investor concentration was on what kind of a message the Fed Reserve would deliver after its two-day meeting starting later on Tuesday.

“The latest rise in Treasury yields is underpinning the dollar, but it is a wait-and-see mood that is mostly prevailing in the market ahead of the Fed’s decision,” said Shin Kadota, senior currency strategist at Barclays (LON:BARC) in Tokyo.

“Expectations for a hawkish dot plot was a factor that has pushed up the dollar recently, with hopes for the number of times the Fed could hike rates this year having increased to four from three.”

The “dot plot” is policymakers’ rate projections and provides a view into their interest rate outlook.

The dollar index against a group of major currencies (DXY) increased  0.1% at 101.410, adding to modest gains made the previous day.

Having gone to 115.510 on Friday, the U.S. currency was steady at 114.850 yen,  its highest since Jan. 19.

The euro was effectively flat at $1.0651.

On Monday, the  common currency had increased to a one-month peak of $1.0714, increased after some members of the ECB’s Governing Council talk over the possibility of higher interest rates at the previous week’s policy meeting.

But its increase was tempered later on Monday after European Central Bank (ECB) Governing Council member Jan Smets reportedly said the previous week’s policy meeting was not an indication of approaching policy change. Bank of France Governor Francois Villeroy de Galhau also stated increasing inflation in the euro zone was extremely exaggerated.

Caution in advance of the upcoming elections in Holland also capped the euro. On Wednesday, the Dutch will vote  in an election that was seen as a test of anti-immigrant sentiment.

“The market faces a series of event-related risks. It’s hard to predict whether that would be the Dutch elections, the Fed policy decision, (U.S. President Donald Trump’s) budget proposal or the G20 meeting, but the dollar faces significant downside risks,” said Masashi Murata, senior strategist at Brown Brothers Harriman in Tokyo.

Murata added that latest expectations for four U.S. rate increases this year considered excessive, and that the Fed Reserve meeting could help calm exaggerated policy tightening expectations.

On Thursday, the Trump administration’s fiscal 2018 federal budget plan will be released, and then on Friday,  G20 finance ministers and central bankers will meet in Germany.

Sterling was a touch lower at $1.2200, its increased overnight stalling after parliament passed a legislation giving British Prime Minister Theresa May the power to start the European Union  exit process. Theresa May has now cleared the final obstacle standing between her and the beginning of the divorce talks.

The pound had surged 0.4% overnight after Scotland’s First Minister Nicola Sturgeon demanded a fresh Scottish independence referendum, however, stated it should take place at the earliest in late 2018.

The Australian dollar declined 0.15% at $0.7561, giving back some of the previous day’s gains made when the greenback  fell against the euro.

The 10-year U.S. Treasury note yield (US10YT=RR) was at 2.616% after increasing overnight to 2.628%, its highest since mid-December.

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