LDN - Business

Dollar climbs as North Korean tensions ease

[August 15, 2017] By Patrick Graham

LONDON (Reuters) - Gains against the yen and a weakened British pound led a broad rise in the U.S. dollar on Tuesday, helped by an easing of the tensions around North Korea that last week drove capital towards Switzerland and Japan.

The yen <JPY=> and the Swiss franc <CHF=> had both surged as Washington and Pyongyang ramped up military threats following the imposition of new sanctions on the Koreans through the United Nations 10 days ago.

However, a North Korean state media report on Tuesday that leader Kim Jong Un had delayed a decision on firing missiles towards the U.S. Pacific territory of Guam was taken by markets as another sign that the threats were rhetorical.

Currency market strategists also point to a general recovery by the dollar over the past two weeks after its worst four months since 2011 against the euro and the basket of currencies <.DXY> used to measure its broader strength.

Sterling also slumped after inflation numbers came in marginally below forecast, pushing the pound through key levels against both the euro and dollar that triggered batches of automatic sell orders.

"Selling dollars isn't as easy now as it was in June because of positioning," said Stephen Gallo, head of European FX strategy with Bank of Montreal in London.

"The market is short dollars versus G10 (currencies), probably now short versus emerging markets and, I think, short versus China. So if you sold the dollar at the start of June, why wouldn't you take some money off the table now?"

Gallo pointed to a raft of political and economic event risks - ranging from German elections to the expected start of the U.S. Federal Reserve's balance sheet wind-down - that move into view in September as reasons for investors to consolidate on anti-dollar plays.

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Japan Yen and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The dollar index rose 0.4 percent in morning trade in Europe, including a quarter percent gain against the euro to $1.1738. <EUR=>

It gained 0.7 percent to 110.42 yen <JPY=>, taking it back to levels last seen before U.S. President Donald Trump promised last week that North Korea would be met with "fire and fury" if it threatened the United States.

Poorer than expected German growth numbers also played into moves early in the European day. They showed Germany, Europe's biggest economy, growing 0.6 percent on the quarter compared to expectations of 0.7 percent in a Reuters poll.

The pound sank 0.7 percent to a five-week low of $1.2867 <GBP=> and half a percent to a five-month minimum of 91.32 pence per euro. <EURGBP=>

The European Parliament's Brexit coordinator Guy Verhofstadt contributed to sterling's weakness by saying Britain's proposals for its future customs relationship with the EU were "a fantasy".

"It would now seem to be almost impossible for the Bank of England to raise interest rates while inflation is close to its peak, and UK growth the weakest in the G7," said Azad Zangana, Senior European Economist and Strategist at Schoeders in London.

(Editing by Gareth Jones)

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