US dollar slides further as risk appetite returns

London

THE dollar headed for its fourth successive day of losses on Monday as broad risk appetite returned and investors questioned whether a recent rally by the greenback had run out of steam.

The dollar index against a basket of six major currencies hit a 4 1/2-month high last Wednesday, as a rise in US Treasury yields highlighted the wide interest rate gap between the United States and other countries.

But the surge was stymied by soft April US consumer price data published last week that introduced doubts about expectations that the Federal Reserve would raise rates as many as four times in 2018.

The index fell 0.3 per cent on Monday to 92.402, backing further away from last week's 2018 peak.

Growing worries about the US budget deficit, which is projected to balloon to more than US$1 trillion in 2019 due to a government spending splurge and large corporate tax cuts, have also undermined the dollar along with concerns about the country's current account deficit.

"Barring a significant, and unlikely, pickup in productivity, a persistent USD rally is unlikely as the twin deficits crowd out private investment by raising borrowing costs," said Hans Redeker, global head of currency strategy at Morgan Stanley in London, in a note.

Economists say President Donald Trump's tax cuts and spending plans could backfire by overheating an already strong economy and causing an unwanted pick-up in inflation.

The euro, meanwhile, headed for a third successive day of gains on Monday encouraged by the weaker dollar.

The single currency crept higher even as investors kept a wary eye on political events in Italy.

Italy's anti-establishment 5-Star Movement and the far-right League, both hostile to European Union budget rules, spent the weekend in talks to forge a common policy programme. The parties were adversaries as recently as March but now look likely to form Italy's next government.

The euro gained 0.4 per cent to US$1.1986, having fallen last week to US$1.1823, its weakest since Dec 22.

"Italian politics aren't a major moving factor in the euro zone yet. It's not an existential threat and isn't driving a lot of positioning," said Manuel Oliveri, an FX strategist at Credit Agricole in London.

"I expect inflation to rebound in the euro zone and that will keep the European Central Bank's stimulus unwinding on track," he said. REUTERS