Greenback grows in confidence

London

THE US dollar is poised for one of its best weeks, thanks to strong economic data that makes a near-term cut in US interest rates unlikely.

Sterling was on firmer ground at the end of a bad week that has seen it take a beating from renewed concern over a hard Brexit.

"The small bounce in the dollar index probably sets up for slightly better levels to sell into next year," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

"We still favour a cheaper dollar, due to growth headwinds in the US, relative to elsewhere. There are also factors such as elevated political risk as we head into the presidential elections."

"We've held a constructive view on the dollar for two years and expect it to hold relatively steady in the first half of next year, then weaken against the euro as we think the Fed will have to cut rates again," said Piotr Matys, a currency strategist at Rabobank.

Meanwhile, a stunning rally in the Hong Kong dollar is unravelling quickly, with the currency briefly falling back to the weak half of its trading band. The exchange rate dropped to as low as 7.8015 per greenback, past the midpoint of 7.8 in its allowed trading range.

The pullback in the Hong Kong dollar followed a seven-day advance, which made the currency the most overbought in more than a year, according to its relative strength index.

The Hong Kong dollar will fall to 7.82-7.83 as the currency's one-month interbank borrowing costs, known as Hibor, drifts lower as 2020 arrives, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd.

As for the yen, traders hoping for more volatility in the yen next year are likely to be disappointed.

But bulls can take solace in the currency's upward bias amid a narrowing in the interest-rate differential between the US and Japan. That's the view of analysts in Tokyo who expect trading versus the dollar to be confined to a 10-yen range in 2020, with the topside capped at about 101.

"Strength in both the yen and the dollar has made the pair immobile, but next year may see a bit more life, with a shift in the balance between the two," said Minori Uchida, head of global market research at MUFG Bank Ltd in Tokyo.

He sees the yen strengthening slowly but steadily each quarter in 2020 and ending the year at 104 per dollar.

"The bias is more for a firmer yen," said Daisuke Karakama, chief market economist at Mizuho Bank Ltd in Tokyo. REUTERS, BLOOMBERG