Dollar at two-week highs as weakness seen overdone; euro dips

[February 08, 2018]   By Jemima Kelly

LONDON (Reuters) - The dollar edged higher to a two-week high against a basket of major currencies on Thursday as investors covered some short positions against the greenback on a growing view that the currency's recent weakness may have gone too far.

A selloff across global stock markets since late Friday and bets that the United States could see at least three interest rate hikes in 2018 have driven the dollar up in recent days, with the currency gaining more than 2 percent against its basket over the past week <.DXY>.

"We have seen some short-covering on the dollar after the selling in January and the greenback is looking to form a short-term base here," said Lee Hardman, a currency strategist at MUFG in London.

The dollar <.DXY> was 0.1 percent higher on the day at 90.30.

The euro was down by a similar amount at a two-week low of $1.22355. The single currency has lost more than 3 cents since hitting a three-year high of $1.2538 just 10 days ago.

"The market is in consolidation mode," said Commerzbank currency strategist Esther Reichelt in Frankfurt. "The dollar performed relatively well during the stock market turmoil, and this experience determined the market sentiment going forward."

Reichelt added that the euro had looked likely to fall, after climbing for seven consecutive weeks despite an increasingly divergent monetary policy between the United States and Europe, where the European Central Bank is still in the midst of an expansive asset-purchase program.

"NO SENSE OF PANIC"

Traditional safe havens such as the yen and Swiss franc have seen only modest gains during the recent stock market volatility, and indeed the dollar was up against both on Thursday <JPY=> <CHF=>.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

"Everyone knew that the stock market was due a correction so there's no sense of panic, and that dampens demand for safe havens," said Reichelt.

Higher U.S. yields also underpinned the greenback.

"Yesterday, U.S. Treasury yields rose, so generally speaking, that has led to dollar strength," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

The yield on benchmark 10-year Treasury notes <US10T=RR> stood at 2.824 percent, compared with its U.S. close of 2.843 percent on Wednesday.

The benchmark yield rose as high as 2.885 percent on Monday, its highest since January 2014, after stronger inflation data led investors to fear that the Federal Reserve may raise rates more often than previously expected.

The dollar's rebound is unlikely to be sustainable, according to a Reuters poll of strategists published on Thursday.

The New Zealand dollar was the biggest mover among developed-market currencies, skidding as much as 0.6 percent to four-week lows of $0.7192 against its U.S. counterpart after the Reserve Bank of New Zealand kept interest rates steady at a record low.

It said volatility in equity markets this week was a warning that global markets were nervous about the risk of higher inflation and rising interest rates.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://
emea1.apps.cp.extranet.
thomsonreuters.biz/cms/?pageId=livemarkets

(Reporting by Jemima Kelly; Editing by Gareth Jones)

[© 2018 Thomson Reuters. All rights reserved.]

Copyright 2018 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.