The leading U.S. dollar index struggled for clear direction and stuck around break-even levels on Friday just hours after hitting a seven-month high, as trades weighed the next round of trade jabs between the U.S. and China against the week’s interest-rate divergence theme.
The White House announced the latest round of 25% import tariffs on some $50 billion worth of Chinese goods. Beijing responded to the approval by saying it will impose levies of its own on $50 billion in U.S. products.
“The dollar lost some luster in choppy Asian and European session trade as short covering flows and market fears of fresh Trump tariffs against China unwound some of the massive gains from yesterday,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in a Friday research note.
The ICE U.S. Dollar Index DXY, -0.09% was last at 94.783 little changed but still on track for a 1.3% gain on the week, following Thursday’s rally in which the index added more than 1%, according to FactSet. The broader WSJ Dollar Index BUXX, +0.01% was little changed at 88.03.
Even though the short-term economic impact from one-for-one retaliations between the two economic powerhouses would likely be modest, “the increased uncertainty and risks will weigh on business confidence and investment, especially cross-border investment,” said research from Oxford Economics. “This there will be an impact on growth, in China, the U.S. and elsewhere, at a sensitive time for the global economy.”
On the one hand, developed world interest-rate differentials moved decisively in the buck’s favor this week, with the Federal Reserve hiking rates by 25 basis points to place the fed-funds rate at a range between 1.75% and 2%, while the European Central Bank said it would keep rates on hold until at least summer 2019, ensuring at minimum another 12 months of higher rates in the U.S. versus the eurozone.
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This gave the dollar a massive boost on Thursday, and led to the largest one-day percentage loss for the euro EURUSD, +0.3285% in two years.
On Friday, the euro last fetched $1.1614 up from $1.1569.
Meanwhile, the Bank of Japan, which is expected to be one of the last developed-market central banks to move on interest rates, kept short-term interest rate at minus 0.1% and its target for the yield on 10-year government bonds at around 0%, reinforcing the theme that rates will only rise in the U.S. for now, making U.S. assets more attractive. The greenback last bought ¥110.60 USDJPY, -0.08% down from ¥110.63 late Thursday in New York.
“The movements in dollar-euro over the past few days are a reminder that Fed and ECB policy are still important drivers of the exchange rate. Our view remains that their policies will provide ongoing support for the U.S. currency in the rest of 2018, before becoming a significant drag in 2019,” said John Higgins, chief markets economist with Capital Economics.