Dollar hits fresh 11-month high on trade war fears

London

THE dollar rose to a fresh 11-month high and the euro hit another low on Thursday as investors increased their bets on a prolonged period of monetary policy divergence between the US and European central banks.

The euro also weakened on Thursday to its lowest since July 2017 after the Italian government appointed two eurosceptics to head key finance committees, reigniting worries about anti-euro voices in the eurozone's third-largest economy.

Concerns over an escalation in a US-China trade conflict, underlined by comments from top central bankers on Wednesday, have also boosted the dollar as traders reckon a more serious dispute would be inflationary for the US economy, forcing the Federal Reserve to tighten rates further.

"We are really seeing divergence in monetary policy in the eurozone and the US for many months to come," said Esther Reichelt, a currencies analyst at Commerzbank in Frankfurt.

"This general sentiment has not been fully priced into the market." The dollar index against a group of six major currencies rose half a per cent to 95.483, its highest since mid-July 2017.

Buoying the greenback, long-term Treasury yields also bounced back from three-week lows. Those yields were propped up by remarks from Fed chairman Jerome Powell, who said on Wednesday that the US central bank should continue with a gradual pace of rate increases.

The euro fell more than half a per cent to US$1.1508, below its recent low of US$1.1531 hit last week.

"Sometimes, you have to trade and ask questions later. A spike in Italian yields would be reason enough to sell euros," said Neil Jones, head of hedge fund FX sales at Mizuho.

The dollar rose 0.2 per cent to 110.6 yen, moving further ahead from a one-week low of 109.55 struck on Tuesday.

The Swiss National Bank kept its negative interest rate on hold on Thursday, as expected, but the franc rallied against the euro as some traders saw a slightly more hawkish tone from the central bank.

Norway's central bank also kept rates on hold but said it was on track to raise rates in September - sending the Norwegian crown to fresh eight-month highs.

The New Zealand dollar retreated to a six-month low of US$0.6838 after domestic data that showed slowing first-quarter economic growth boosted expectations that the central bank would keep interest rates low. REUTERS