Dollar index hits nine-day high. CPI overshadows trade worries

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OVERNIGHT MARKET SUMMARY

The U.S. dollar index, a measure of the greenback’s value against a basket of its major rivals, jumped to a nine-day high overnight as investors weighed mounting signs of inflation against increasing concerns about a trade war and what it all means for the outlook for Fed monetary policy. The dollar has so far, benefited on a trade-weighted basis from rising tensions with its major trading partners. While nobody would win in the event of a sustained disruption to global trade or an all-out trade war, investors see the U.S. as currently better positioned to ride out the escalating spats with China and the EU. Moreover, investors see some inflationary aspects of a trade war (rising cost of imported goods) feeding into the Fed’s focus on overall price pressures and keeping the central bank biased toward steady policy normalization, despite the increasing market volatility.

This morning, closely watched data on U.S. consumer prices showed that while month-over-month headline CPI barely rose (up 0.1%) in June, the annual rate of consumer inflation came in at its highest level since February 2012. Core inflation, which strips out volatile food and energy, rose to 2.3%(y/y) last month, its highest reading since January 2017. Today’s CPI data come on the heels of yesterday’s six and a half-year high for headline PPI and should keep the outlook for steady Fed lending rate increase through this year and into 2019 at the top of investors’ minds.

The Japanese yen tumbled to its lowest level in six months overnight despite the heightened volatility in global financial markets this week and the mounting concern about a trade war. While the yen is historically the go-to safe-haven for global investors during times of rising geopolitical or economic uncertainty, it seems to have recently lost some of its safe-harbor allure. With U.S. rates biased higher and the U.S. economy seen as better positioned to ride out a trade war, dollar assets continue to be favored by capital allocators.

The euro fell to a one-week low against the broadly firmer U.S. dollar overnight. The minutes from the ECB’s June 14th Governing Council meeting sounded a somewhat dovish tone, with policymakers emphasizing the “open-endedness” of its guidance on normalization of rates. While the ECB did map out its plans to wind down its emergency asset purchase program, it remained purposefully vague on the timing of an eventual interest rate increase.

USD: The dollar index firmed to a nine-day high this morning as investors continued to favor U.S. assets amid escalating trade war fears and in light of recent inflationary U.S. economic data. The greenback’s performance has been mixed but generally positive as investors view the U.S. as being better positioned to ride out a sustained disruption to global trade. While outcomes of a trade war can be extremely unpredictable, for now traders expect other major economies (and central banks) to be more sensitive to risks related to trade uncertainty. A six and a half-year high for June’s PPI yesterday and a one and a half-year high to CPI today underscored the mounting price pressures that have been a focus of Fed policymakers and market participants and a driver of expectations for steady, dollar-supportive policy tightening from the Fed.

JPY: The yen fell to a six-month low against the dollar overnight, despite the heighted market volatility and increasing uncertainty about a trade war. The yen, which tends to benefit during periods of geopolitical or economic uncertainty, seems to have lost some of its safe-haven allure as traders are increasingly favoring dollar assets as a store of value. The yen may also be suffering as the currencies of key Asian trade rivals for Japan have plummeted amid concerns about a trade war with the U.S. The yen would have to fall for Japan to maintain trade competitiveness with its major regional rivals, a scenario that at least for now, is overshadowing the yen’s appeal as a safe-haven.

EUR: The euro slipped to a one-week low against a generally improved U.S. dollar. The single currency’s latest leg lower came after a dovish tone to the minutes from the ECB’s most recent Governing Council meeting, where the central bank laid out plans to wind down its asset purchase scheme, but also pushed out the timeline for an expected interest rate increase to the fall of 2019. The minutes emphasized the open-needed nature of the bank’s guidance on rates, which contrasted the more hawkish outlook for rates in the U.S.

CAD: A roller-coaster few days for the Canadian dollar saw the unit rise to near a one-month peak after the Bank of Canada yesterday hiked rates by 25 basis points and signaled that further policy tightening will likely be needed this year. The Loonie’s rally however, proved to be short-lived, with the C$ falling to a 10-day low overnight amid a general rebound in the U.S. dollar before firming a touch ahead of the North American market open.

DOLLAR OVERNIGHT PERFORMANCE VERSUS
EUR
+0.03%
CAD
-0.33%
MXN
-1.24%
CNY
-0.19%
CHF
+0.60%
DKK
+0.01%
AUD
-0.44%
EUR/CAD
-0.30%
GBP
-0.18%
SEK
+0.61%
NZD
-0.21%
EUR/GBP
-0.11%
JPY
+0.40%
NOK
+0.02%
ZAR
-1.32%
EUR/JPY
+0.40%
MARKETS AND COMMODITIES PERFORMANCE
DOW JONES
24845.89
+0.59%
CRB INDEX

%
FTSE 100
2882.37
+0.60%
US 10 YEAR
2.854
+0.003%
GOLD
1246.71
+4.95%
CRUDE OIL
70.08
-0.30%

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