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Dollar steels for Fed cut; Brexit bashes pound lower

London

THE dollar held near a two-month high on Monday ahead of what is expected to be the first US interest rate cut since the financial crisis, while Britain's rising Brexit risks slugged the pound to a fresh 28-month low.

Most major currencies were keeping moves small ahead of Wednesday's expected 25 basis point cut by the Federal Reserve, but there was at least some action to fill the void.

The pound saw another 0.6 per cent swoon after Britain's new foreign minister and former Brexit chief, Dominic Raab, told the European Union it needed to change its "stubborn" position to avoid a no-deal crunch in October.

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Sterling's drop also followed comments by senior UK ministers over the weekend that the government was ramping up preparations for a no-deal outcome and was working on the assumption that the EU will not renegotiate its Brexit deal.

An opinion poll also showed new British Prime Minister Boris Johnson's Conservative Party has opened up a 10-point lead over the opposition Labour Party, adding to speculation that Mr Johnson will call an early election.

The pound dropped as far as US$1.2299, breaching US$1.23 for the first time since March 2017.

It was also back below 90 pence per euro, while implied sterling volatility gauges had ramped up to highest levels since this March's original Brexit deadline.

"It is just the ongoing hardening of the Brexit line," said Saxo bank's head of FX strategy John Hardy.

"There is so much optionality around it and if there is going to be a cliff edge, people will want to position for it."

The dollar clung to a two-month high against a basket of currencies after better-than-expected US GDP data last week enhanced its attraction against its rivals.

The Federal Reserve is widely expected to cut interest rates for the first time in more than a decade this week.

The dollar index stood little changed at 98.064, after hitting a two-month high of 98.093 on Friday. The euro hovered at US$1.1126, almost flat and not far from Thursday's low of US$1.1101, a trough since May 2017.

"What everyone is interested in right now is whether the US will enter a full rate-cut cycle," said Kyosuke Suzuki, director of forex at Societe Generale. "The GDP figures were a bit stronger than expected, putting a dent to the view of the US entering a long easing cycle."

The US currency also got a minor boost from White House economic adviser Larry Kudlow, who said on Friday that the Trump administration has "ruled out" intervening in markets to lower the US dollar's value.

The dollar stayed around 108.60 yen due largely to month-end selling by Japanese exporters.

It had hit a two-week peak of 108.83 yen on Friday. REUTERS