US dollar struggles on policy uncertainty, political woes

[TOKYO] The US dollar struggled on Monday, wallowing near a 2-1/2-year low against the euro, weighed down by US political uncertainty and uninspiring US data that added to doubts about whether there will be another Federal Reserve rate hike this year.

Growth in the world's largest economy picked up to 2.6 per cent in the second quarter, matching expectations of economists polled by Reuters, but growth in the first quarter was revised down to 1.2 per cent.

US labour costs also rose less than expected in the second quarter, data on Friday showed, adding to concerns that inflation will remain low.

"It is easy for uncertainty to increase about the Fed's ability to raise rates next year if inflation remains low. We could see the dollar head below 110.00 yen under such circumstances," said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

Deepening US political uncertainty was also expected to keep the greenback on the defensive.

President Donald Trump on Friday replaced his White House chief of staff, Reince Priebus, installing retired General John Kelly in his place in a major shake-up of his top team.

"The replacement of Priebus could be a turning point for the Trump administration.

'Trump risk' could now begin to take its toll on US equities, which have been doing well until now, and in turn weigh on the dollar," Mr Ishikawa at IG Securities said.

Hopes that the Trump administration will implement tax reforms and economic stimulus in the near future, seen as US dollar-positive factors, also faded after the US Senate on Friday failed to dismantle Obamacare in another political setback for the president.

The euro was steady at US$1.1743, after the previous day's surge brought it closer to US$1.1777, a 2-1/2-year high set on Thursday.

The US currency was down 0.15 per cent at 110.525 yen after touching 110.475, its weakest since mid-June.

The US dollar index against a basket of six major currencies was 0.2 per cent higher at 93.413, trimming some losses after dropping 0.6 per cent on Friday.

The pound was little changed at US$1.3134 and in close reach of a 10-month high of US$1.3159 scaled on Thursday. Sterling has been buoyant against the broadly weaker US dollar, supported by hopes that Britain will exit the European Union under a transitional deal.

REUTERS