The dollar’s losses have been the euro’s gains, and some strategists expect to see the migration into European assets continue with heightened political uncertainty in the U.S. and doubts about the Fed.
Risks from the French election are out of the way, and the European economy is improving, sending the euro higher. The gusher of funds into European stocks is also driving buying in the common currency, at the same time the dollar is weakening on a recent batch of disappointing U.S. economic data and rising concerns about the political agenda.
Stocks were sharply lower and investors moved into bonds Wednesday as controversy in Washington raised concerns that the Trump agenda of tax reform and fiscal stimulus will be slowed down. The latest uproar was over reports that President Donald Trump asked former FBI Director James Comey to end his investigation into former national security advisor Michael Flynn.
“I think it’s a ‘risk-on, risk-off’ pivot story. That’s where we’ve gone in the last 24 hours,” said Dan Katzive, head of foreign exchange strategy, North America, at BNP Paribas. “It’s a trend of the dollar weakening against current account surplus currencies like the euro and yen.”
Katzive and other strategists say doubts about whether the Fed can raise rates two more times this year have also been a factor weighing on the dollar. “It’s mainly a monetary policy driven story, and whether the financial market distress, if it continues to pick up, will derail that story,” he said. The Fed has forecast two more interest rate hikes by year-end but the fed funds futures market reflects expectations for just one full rate increase.
The dollar has become a play on reflation, and its decline is linked to that, Katzive said. “It’s a combination of the data surprises continue to weaken and the political noise as well,” he said, adding he’s still bullish on the dollar and expects it to stabilize and recover.
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