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Geopolitical risks push US dollar to recent highs

London

THE US dollar firmed within sight of a recent two-year high on Tuesday on the back of ongoing geopolitical risks in the Middle East with investors looking forward to an interest rate cut by the US central bank on Wednesday.

Though a 25 basis points rate cut is firmly baked into market expectations, some market watchers believe this may be the last rate cut for a while until there is more evidence of a US economic slowdown which might encourage dollar bulls. "If the Fed does cut 25 bps, then we think it will be the last time until we really do see signs of recession," Brown Brothers Harriman strategists said. Money markets are pricing in about an 80 per cent probability of another US rate cut by the end of the year.

Against a basket of its rivals, the greenback edged 0.1 per cent higher at 98.744, heading towards a May 2017 high of 99.37 hit earlier this month.

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Geopolitical tensions also boosted demand for the US dollar. Though oil prices pulled back slightly after surging to four-month highs on Monday, they remained about 15 per cent higher than Friday's close as markets remain wary over the threat of a military response to attacks on Saudi Arabian crude oil facilities. While US President Donald Trump said on Monday he did not want to go to war, he said the US was still investigating if Iran was behind the Saudi strikes.

Investors were also watching anxiously an overnight spike in US dollar funding costs. The overnight rate in the repurchase agreement (repo) market jumped to 4.10 per cent from 2.29 per cent late on Friday, its highest levels since the start of the year.

The Swedish crown and the Australian dollar led losers against the greenback after their respective central banks flagged a dovish bias in their latest policy meeting minutes.

The crown was down 0.8 per cent versus the euro at a one-week low of 10.7 crowns and had fallen 0.6 per cent to the dollar at 9.72.

On Sept 5, the Riksbank held the repo rate unchanged at -0.25 per cent and said it still expected to raise rates in coming months. The minutes showed the six rate-setters unanimous about the decision but cautious about the rate hike path.

The Australian dollar also fell 0.5 per cent after the Reserve Bank of Australia flagged an easing bias in meeting minutes. REUTERS