LDN - Business

Dollar rebound leaves investors disinterested

[January 03, 2018] By Saikat Chatterjee

LONDON (Reuters) - The dollar bounced on Wednesday, snapping a three-week losing streak as investors consolidated positions before manufacturing data and minutes of a December U.S. Federal Reserve meeting due later in the day.

But despite the dollar's rebound, market strategists remain downbeat about the prospects of the greenback in the near term on concerns that future U.S. rate hikes were broadly priced into the markets.

"From a DXY basis, there is very little going on for the dollar from current levels as we are seeing the continuation of very easy financial conditions with accompanying fiscal stimulus," said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets referring to the dollar's trade-weighted basket against its rivals by its popular acronym.

Evidence of easy financial conditions were evident with real interest rates in the U.S. holding near their lowest in nearly five years, according to Thomson Reuters data.

The greenback <.DXY> bounced 0.3 percent on the day to 92.10 after falling 2.5 percent over the last three weeks. On an annual basis, 017 was the biggest annual drop for the greenback in 14 years.

Despite the biggest overhaul of the U.S. tax code in 30 years passed by U.S. policymakers in late-December, market analysts believe the worrying lack of inflation pressures would keep the dollar on the back foot in the coming months.

"The key question for markets is what is the game changer for the dollar in the short term and unless we see a significant pick up in inflation, the dollar will remain on the back foot," said Viraj Patel, an FX strategist at ING in London.

Seasonal forces were also at play such as a broad decline in dollar funding requirements over the thin-year period which typically acts as a support for the greenback.

BNP Paribas strategists said dollar funding pressures as noted by cross-currency basis swaps peaked earlier than usual in December and has eased dramatically in recent days, eroding a key support.

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

Euro/dollar cross-currency basis swaps for three-month maturities settled at its tightest levels in nearly three years at 22.5 basis points, indicating that broad demand for dollars was muted. <EURCBS3M=ICAP>.

Meanwhile, the euro <EUR=EBS> was flirting near a four-month high hit on Tuesday prompted by optimism over the euro zone's economy and expectations the European Central Bank will wind down its bond-buying stimulus in 2018.

The ECB board member in charge of the central bank's market operations, Benoit Coeure, said at the weekend he saw a "reasonable chance" bond purchases would not be extended beyond September.

The single currency was trading at $1.2017 after hitting a four-month high of $1.2081 on Tuesday, marking a gain of roughly 3 percent from a mid-December trough and bringing it close to a September high of $1.2092, the currency's highest level since early 2015.

Helping the euro has also been higher eurozone bond yields in recent weeks the spread between ten-year U.S. and German bond yields holding near its tightest levels in nearly six weeks.

Among data due later in the session is manufacturing ISM data in the United States and minutes of the December U.S. central bank meeting.

To view a graphic on USD Index, Treasury yields, click: http://reut.rs/2CKvao6

(This version of the story refiles to change date in bullet point and tweak headline.)

(Reporting by Saikat Chatterjee; Editing by Janet Lawrence and Raissa Kasolowsky)

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