Dollar hits 10-week high before U.S. GDP data

[October 26, 2018]   By Tom Finn

LONDON (Reuters) - The dollar rose to a 10-week high on Friday as investors waited to see if U.S. economic growth figures do anything to interrupt its months of strength.

A recent downturn in stocks and worries about corporate earnings growth has prompted forex investors to buy the yen and Swiss franc, two currencies typically seen as safe havens during downturns.

Analysts see persistent risks for markets including trade tensions and Italy's budget woes.

"Is there a slowdown coming at the moment? That's the question and a combination of geopolitical risks is dragging down sentiment," said Miraji Othman, credit strategist at BayernLB.

A potentially strong reading of U.S. gross domestic product data on Friday could see the dollar climb further, defying U.S. President Donald Trump who has expressed displeasure over the currency's strength.

"Today's robust U.S. GDP will illustrate to the market the deep division between the U.S. and the euro zone when it comes to growth performance," said Commerzbank analyst Thu Lan Nguyen.

Speculation that U.S. interest rates will be hiked more aggressively than anticipated next year would see the dollar strengthen against the euro, she added.

If the reading is lower than expectated, however, investors could worry about economic growth momentum hastening a change in the Federal Reserve's monetary tightening path.

"Today's number could give signs if we are close to peak earnings for U.S. corporates. Housing data and consumer goods durables data has been soft lately," said Sim Moh Siong, currency strategist at Bank of Singapore.

CONSISTENT POLICY GUIDANCE

The U.S. economy is expected to have grown at a 3.3 percent annualised rate in the third quarter, following 4.2 percent in the second quarter. The Fed is expected to raise rates by 25 basis points in December.

The dollar index <.DXY> rose 0.1 percent against a basket of major currencies to 96.749, its highest since Sep 16.
 

 One hundred dollar notes are seen in this photo illustration at a bank in Seoul January 9, 2013. REUTERS/Lee Jae-Won/File Photo

The euro, meanwhile, <EUR=EBS> fell to a 10-week low of $1.135. It hit a two-month low of $1.1353 the previous session, following European Central Bank President Mario Draghi's failure to convince traders the ECB could pursue monetary tightening after next summer as political and economic uncertainties grow in the monetary union.

The policy guidance has been consistent since June, even though the economic outlook has darkened as political turmoil about Italy looms over the currency bloc. [nL8N1X56JH]
 

Analysts said markets remain sceptical about the ECB rates given that inflation remains tepid.

Elsewhere, a rebound of U.S. stocks on Thursday following the previous session's big sell-off was not sustained in Europe, which lent support to safe haven currencies.

The U.S. dollar lost 0.4 percent to trade at 111.89 versus the Japanese yen <JPY=D3>, a safe haven currency, while the Australian dollar <AUD=D3>, often viewed as a gauge of risk appetite, fell 0.7 percent to a 32-month low of $0.7021.

The greenback has been supported by positive sentiment on Wall Street recently as blue-chip names such as Microsoft <MSFT.O> delivered strong earnings.

(Additional reporting by Abhinav Ramnarayan and Vatsal Srivastava in Singapore, Editing by Robin Pomeroy, William Maclean)

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