US dollar pauses for breath as fragile pound edges up

THE US dollar took a pause on Tuesday (Sep 27) in what has been a relentless climb higher as under-fire sterling as well as the euro and Japanese yen recovered some ground from multi-year lows, but medium-term fundamentals were still in the greenback’s favour.

Sterling climbed over 1 per cent to US$1.0810, on track for its biggest daily percentage gain in nearly 7 weeks, the euro rose 0.2 per cent to US$0.9629, and the US dollar slid 0.3 per cent against the yen to 144.28.

The decline in the US dollar was broadly in line with a recovery in markets’ sentiment towards riskier assets, which also boosted European stocks and US share futures, and was helped by US treasury yields steadying after their recent gains.

“We’ve seen some people trimming their long US dollar positions a bit, but we’re looking to the New York open to see how those Treasury yields are going to play throughout the day,” said Simon Harvey, head of FX analysis at Monex Europe.

“All it needs is them to pick up a bit and the risk environment becomes less supportive, and then you start wondering what happens to UK investor sentiment. This brief flurry of strength in the pound feels like it’s on shaky ground.”

Tuesday’s moves were minor compared to the US dollar’s significant recent gains. The euro was still near its 20-year trough hit a day earlier, and the yen was just off its 24-year nadir hit last week before Japanese authorities intervened to strengthen the currency.

Sterling was not too far from its record low of US$1.0327 hit on Monday, the end of a plunge that began on Friday when markets were spooked by Britain’s gambit of relying on unfunded tax cuts to spur growth, which also sent short-term gilt yields up 100 basis points in 2 days.

Investors will watch an appearance by the Bank of England’s chief economist, Huw Pill, at a panel event beginning at 1100 GMT.

The central bank on Monday said it would not hesitate to change interest rates and was monitoring markets “very closely”, though did not take any immediate action.

Broad fundamentals are still pointing to a stronger US dollar in the medium term.

“Everyone’s got this hope that the US dollar is peaking and peaking and peaking, but it’s just been far too premature,” said Paul Mackel, global head of FX research at HSBC.

“The Fed is firmly hawkish and global growth is weakening, and you put those forces together alongside higher elements of risk aversion – it’s all pointing to a strong US dollar, if not a strengthening US dollar.”

The US dollar index was at 113.6, down 0.5 per cent on the day, but still near its 20-year top of 114.58 hit the day before.

The Aussie and kiwi, which hit 2½ year lows on Monday, were also on the rebound, with the Aussie up 0.57 per cent to US$0.6490 and the kiwi up 1.2 per cent to US$0.5702.

Bitcoin, which also often moves in line with risk sentiment, hit a 10-day top and was last up over 5 per cent at around US$20,200.