Dollar gains as US economy stays strong

London

THE dollar rose to its strongest level in 2020 on Monday after last week's run of data confirmed that the US economy is holding up well, while China's yuan briefly hit a new six-month high.

Mostly, however, it was another quiet start to the week for currencies, with FX volatility near all-time lows and little in the way of key economic data.

Investors are focused on central bank meetings in Japan, on Tuesday, and the European Central Bank meeting on Thursday.

Trading volumes were thin as Lunar New Year approaches in Asia and with US markets closed for Martin Luther King day on Monday.

Figures on Friday showed US homebuilding surged to a 13-year high in December. Retail sales also rose and a gauge of manufacturing activity rebounded to its highest in eight months.

The strength in the US economy underlines its relative outperformance versus the euro zone, although recent data point to a bottoming out in the European economy, as well as a recovery in China.

"Data released since the previous ECB meeting have been positive and consistent with the slightly more optimistic tone struck by (ECB President Christine) Lagarde in December regarding the economic outlook," RBC Capital Markets' currency strategist Adam Cole said.

The dollar edged up 0.1 per cent against a basket of currencies, with the index rising to as high as 97.727, its strongest since Dec 24. The euro was down marginally at US$1.1085.

China's offshore yuan increased to as high as 6.8458, a new six-month high, before the rally fizzled. It traded at 6.8715, down slightly, by 1145 GMT. China on Friday posted its slowest annual growth figure in almost 30 years, although December data showed revived business confidence and quickening factory output.

Sterling dropped on Monday to as low as US$1.2962, down 0.3 per cent, after weekend comments by finance minister Sajid Javid that Britain would not commit to sticking to European Union rules in post-Brexit trade talks.

Sterling also declined versus the euro to 85.315 pence, down 0.1 per cent on the session.

The pound is now at the mercy of employment data on Tuesday and business surveys at the end of the week. Money markets price in a near 70 per cent chance of a Bank of England rate cut later this month in the face of a struggling economy.

Japan's yen was unchanged against the dollar at 110.15 yen ahead of the BoJ meeting on Tuesday. REUTERS