Currencies: Dollar Index Rises To Fresh 3-month High, On Track For Best Week Since Nov. 2016

The U.S. dollar rallied against most of its major rivals on Friday, putting it on track for its best weekly performance since late November 2016.

The dollar was helped by a stumble in the British pound, after U.K. growth figures widely undershot analysts’ forecasts, while the euro remained on the back foot after the European Central Bank struck a relatively cautious tone at its meeting on Thursday.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.20%  rose 0.3% to 91.790, trading around at a fresh highest level since mid-January, according to FactSet data. For the week, the index is on track for a 1.6% gain, which would be its biggest weekly jump since November 2016.

The pound GBPUSD, -0.9917%  dropped to $1.3778, down from $1.3915 late Thursday in New York and hitting its lowest level since early March.

The euro EURUSD, -0.2148%  fell to $1.2089, compared with $1.2104 on Thursday, falling to its lowest since mid-January.

The Japanese yen USDJPY, -0.06% was rather range-bound in its trading, swinging between small gains and losses, with the dollar last buying ¥109.24, compared with ¥109.30 on Thursday.

Elsewhere in Asia, Korea’s won USDKRW, -0.81%  rallied as the leaders of North and South Korea signed a declaration to work towards a “complete denuclearization” of the Korean peninsula. One dollar last bought 1,068.02, compared with 1077.71 won late Thursday in New York.

The won also strengthened against the Japanese yen KRWJPY, +0.7890%  , which is perceived as a haven during times of turbulence, last buying ¥0.1023, up 0.9%.

What’s driving the market?

The U.S. dollar continued its recent uptrend, which was initially inspired by rising Treasury TMUBMUSD10Y, -0.44%  , but also got a boost from supportive economic data in the U.S. and disappointing data elsewhere. First quarter U.S. GDP grew 2.3%, beating consensus estimates of 2%.

Sterling was the worst performer among major currencies on Friday, after official data showed the U.K. economy grew at its slowest pace in more than five years in the first quarter of 2018. The data dampen the case for an interest-rate increase from the Bank of England when it next meets in May.

The Office for National Statistics said Friday that gross domestic product in the U.K. expanded by 0.1% in the first quarter. Economists had expected a reading of 0.3% in the preliminary report. It was a visible slowdown from the fourth quarter of 2017, when GDP grew 0.4%.

Meanwhile, the euro added to losses from Thursday that came after the ECB’s policy meeting. The central bank kept policy unchanged, but gave no new guidance on interest rates or its bond-buying program.

Read: ECB live blog recap: Draghi cites ‘caution tempered by unchanged confidence’ after soft first quarter

What are strategists saying?

“We believe the trapped dollar is about to break out to the strong side. The balance between positive cyclical drivers and structural and political headwinds is leaning increasingly towards the former,” David Bloom, global head of FX strategy at HSBC, said in a note.

“The Fed looks likely to match its ‘dots,’ once again confounding the market’s more dovish stance. In contrast, other central banks across the G10 face challenges to begin or extend their tightening process,” he added.

“The dollar’s momentum continues, as GDP came in above expectations, even though it slowed from previous quarters,” said Peter Ng, senior FX trader at Silicon Valley Bank.

Of the pound’s steep drop, Ng said: “Last week’s expectations for an imminent rate hike from the Bank of England were around 80-90%, now they’re less than half of that.”

“A sharp decline in Q1 UK GDP has done little to help the cause of sterling bulls, with today’s data wrapping up a tumultuous fortnight the pound. With expectations for a May rate hike now standing at 34%, it is clear what an incredible shift we have seen over the past weeks, with expectations standing at a lofty 88% last Monday,” said Joshua Mahony, market analyst at IG, in a note.

What else is in focus?

Besides GDP data, the first quarter employment cost index came in at 0.8%, narrowly beating expectations of 0.7%.

Consumer sentiment for April is due at 10 a.m. Eastern.

U.S. stocks opened higher, as a rally in technology stock continued on from Thursday, with both the Dow Jones Industrial Index DJIA, -0.02%  and S&P 500 SPX, +0.23% in the green.

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