Dollar hovers above one-month low

London

THE dollar held near a one-month low against a basket of currencies on Thursday as investors digested the implications of a generally dovish outlook from the US Federal Reserve after it raised interest rates by a quarter point as widely expected.

While markets were quick to interpret the Fed's forecasts for inflation and growth as signalling that interest rates would rise less quickly than previously expected, some said a tightening in general dollar funding conditions could be dollar positive in the short term.

"We were negative on the dollar last year for a variety of reasons but the latest concerns about the dollar liquidity conditions and the trade war headlines makes us a bit more constructive on the dollar," said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

While the outbreak of a global trade war is generally seen bad for the greenback, some market watchers say the traders could turn to the global reserve currency for security if the trade skirmish morphs into a broad market selloff.

Though the dollar was 0.1 per cent lower against a basket of currencies at 89.710, it was still holding above a one-month low of 89.396 hit in early London trades.

The Fed raised US interest rates by 25 basis points to 1.75 per cent on Wednesday and signalled two more hikes for 2018, but dollar bulls were expecting a total of four rate hikes in 2018. Escalating rhetoric on trade also put pressure on the dollar. China accused the United States of "repeatedly abusing" trade practices as it braced for US tariffs worth as much as US$60 billion on Chinese imports.

A global benchmark for banks to borrow dollars for three months on Thursday rose to its highest level since late 2008.

Analysts said a rise in dollar funding costs might push the dollar higher if tighter financial conditions translate into a global rush to secure funds.

Its losses were more pronounced against the Japanese yen, against which it was down 0.3 per cent at 105.69 yen.

"The Fed hiking rates three times, and even four times, this year won't be too big of a surprise for the currency market, which fully expects the Fed to continue normalising policy," said Shin Kadota, senior strategist at Barclays in Tokyo. REUTERS