Dollar downbeat as Brexit optimism lifts pound and euro

London

THE dollar was crawling towards its worst month since January 2018 on Monday as intermittent waves of Brexit optimism pushed the pound to a 51/2 month high and kept the euro's bumper October intact.

Despite the failure of Britain's "super-Saturday" to live up to its billing when UK lawmakers delayed a vote on a reworked Brexit deal, there seemed to be tentative hopes that it would eventually be passed.

Asia had dragged the pound 0.5 per cent lower but it rebounded in Europe and briefly broke above US$1.30 for the first time in 51/2 months as the flow of headlines resumed.

A lawmaker from the Northern Irish Democratic Unionist Party, whose votes could be vital to the deal passing, said it would not support a possible opposition party amendment to put the UK in a customs union with the EU. Some saw that as suggesting it could support the deal, although there were other hurdles to clear, including whether the British Parliament's speaker would even allow another vote at this stage.

"I think markets are really trying to feel their way through this," said Ned Rumpeltin, TD Securities' European head of currency strategy. "But what is clear is you don't want to be caught short the pound at this point." The political manoeuvring puts the timing of the whole process in question yet again, even though markets seem assured that it significantly reduces a 'no-deal' Brexit, considered by many to be the worst-case scenario for the UK economy. Goldman Sachs said it sees the chance of a no-deal Brexit reduced to just 5 per cent, from 10 per cent previously.

Elsewhere, currency moves were limited, though the last few weeks has seen some sizeable shifts taking place.

The dollar is down 2.5 per cent this month against a basket of top currencies which, if it stays that way would be its worst month since January last year. It hovered at US$1.1157 per euro on Monday but managed to claw up to 108.48 against the safe-haven Japanese yen. The yen has been weak too. Last week it hit a 21/2 month low.

The Bank of Japan meets next week and its governor Haruhiko Kuroda said that it could "certainly" cut rates again if needed. "If we need further easing of monetary conditions, we would certainly reduce short- to medium-term interest rates. But we don't want to reduce super-long interest rates," he said on Saturday.

There is plenty of central bank action in store this week too. Thursday will be Mario Draghi's last meeting in charge at the European Central Bank and comes amid divergence over its recent decision to restart bond buying.

China's yuan firmed on Monday after its central bank fixed the daily midpoint at its strongest in five weeks, and a comment from the central bank chief that the exchange rate was at the "appropriate level" reinforced market sentiment. REUTERS