Dollar index pares some gains after four-straight weeks of improvement

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OVERNIGHT MARKET SUMMARY

The U.S. dollar slipped across the board overnight following a long weekend in both the U.S. and Canada. The greenback’s heavier tone comes after four-straight weeks of improving performance against a basket of its major rivals, fueled by increasing expectations for another dollar-supportive lending rate increase in December, mounting hopes that lawmakers in Washington are inching closer to a deal on tax reform and a rising sense of political uncertainty in the euro zone.

The greenback pared some of its recent gains to start the holiday-shortened week amid a backdrop of a stronger euro and ahead of key U.S. economic data late in the week on retail sales and consumer inflation.  Investors currently see around an 80% chance of a third Fed interest rate hike for this year in December. Any signs of rising inflation later this week would likely push that figure, and the greenback higher.

The euro found support against the greenback following a much stronger than expected reading of German trade data for August and after an ECB Executive Board member said the central bank should scale back its monthly asset purchases next year. The bounce brought the single currency to near a one-week high against the generally heavier U.S. dollar this morning.

The British pound found its footing against the greenback after a stronger than expected reading of manufacturing output in August released overnight. The solid reading of August’s output came on after an equally strong reading the previous month, which helped revive some hopes for a BOE lending rate increase in the months ahead. The data provided the pound with some much-needed respite from selling pressure that has been fueled by mounting questions about the future of U.K. Prime Minister Theresa May.

USD: The dollar pared some of its impressive gains of late following a long weekend in the U.S. and ahead of some key economic data late in the week. The dollar index’s rise over the past four weeks had been fueled by increasing odds for a December rate hike (up to around 80% from below 40% late last month), mounting hopes that some progress is being made on a comprehensive plan to reform taxes and by the resulting rise in U.S. Treasury bond yields. The most recent pullback in the greenback notwithstanding, the dollar stands to benefit from an upbeat tone to the minutes from the Fed’s late-September FOMC meeting this Wednesday and from signs that inflation pressures are finally starting to mount in September’s CPI on Friday.

EUR: The euro bounced to a one-week high against the generally heavier U.S. dollar this morning, boosted by solid German trade data and some hawkish comments from an ECB official. Seasonally adjusted German exports rose by 3.1%(m/m) in August, which helped push the trade surplus in the bloc’s largest economy higher than expected for the month. The resilience of Germany’s exports, the lifeblood of the euro zone’s broader economy, suggests that trade has so-far not ben meaningfully impacted by the strength of the euro. Separately, an ECB Executive Board member called for the bank’s monthly asset purchases to be wound down in 2018- hawkish commentary that added to the euro’s buoyant tone overnight.

GBP: Sterling firmed further off of a one-month low against the broadly heavier U.S. dollar overnight. The bounce in the pound off of last week’s lows came after September’s manufacturing output doubled market expectations for a rise of 0.2%(m/m). It was the second straight monthly upside surprises to the data set and helped to revive, albeit modestly, hopes for a BOE lending rate increase in the months ahead.

CAD: The Canadian dollar firmed to start the holiday-shortened week north of the border. The loonie’s strength comes against the broadly heavier greenback and is being partially fueled by the rise in commodities like crude oil overnight. The loonie is also drawing residual support from data last Friday, which showed a surprising rise in wages combined with a drop in the nation’s unemployment rate in September. The supportive employment figures helped keep alive expectations for one more CAD-supportive BOC lending rate increase by December.

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