US dollar gains vs yen, euro with outlook seen positive still

[NEW YORK] The US dollar firmed against the yen and euro on Tuesday, after several days of losses in the wake of President Donald Trump's inaugural speech promising more trade protectionism, with the US economic outlook still seen as better than that of Europe or Japan.

"While there remains plenty of uncertainty surrounding the timing and impact of any new fiscal stimulus, we remain confident that monetary policy will continue to diverge as the Federal Reserve is likely to implement two to three rate hikes in 2017 while other major central banks remain in easing mode," said Jim Smigiel, head of global portfolio strategy at SEI Investments in Philadelphia.

That should support the broader trend of dollar strength, he added.

Juan Perez, currency trader at Tempus Consulting in Washington, however said there is plenty of unease in the market still.

"The market is still on a roller-coaster."

He added that investors are particularly worried about Mr Trump's plan to renegotiate the North American Free Trade Agreement with Mexico and Canada and his abandonment of the Trans-Pacific Trade Partnership with Asian countries.

Comments about the need for a weaker US dollar from Mr Trump and his pick for US Treasury Secretary, Steven Mnuchin, were also a concern.

The US dollar had soared over 6.0 per cent to 14-year highs against a basket of major currencies in the eight weeks following Mr Trump's surprise election victory in November.

Investors bet his promised infrastructure spending and tax cuts would boost economic growth and inflation, leading the Federal Reserve to raise interest rates faster.

After peaking in early January, that rally has stalled for now, with the US dollar down 3.5 per cent against a basket of major currencies in the past three weeks. The US dollar index last traded up 0.2 per cent at 100.35.

Against the yen, the US dollar rose more than one per cent to 113.87 yen.

"Interest rate differentials are providing modest US dollar/yen support with the two-year US-Japan yield spread pushing back toward 140 basis points," said Eric Theoret, currency strategist at Scotiabank in Toronto.

The euro, which had looked to be heading toward parity with the US dollar at the end of 2016, has recovered above US$1.07 and hit seven-week highs of US$1.0774 in early Asian trading on Tuesday. By late New York trading though, the euro was down 0.4 per cent at US$1.0724.

Sterling, meanwhile, slipped 0.2 per cent to US$1.2503 after Britain's Supreme Court ruled that the government would need approval from Britain's parliament before formally triggering the country's departure from the European Union.

REUTERS