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Led by Strong Euro, Dollar Tumbles Against Basket of Major Currencies

James Hyerczyk
Forex Daily Outlook – October 17, 2018

The U.S. Dollar closed lower against a basket of currencies during the holiday-shortened week. The Greenback extended the weakness which began on June 28 when it reached a multi-month high at 95.255. This was the same day that the Euro reached a bottom at 1.1527. Since the index is heavily weighted in the Euro, it tends to dictate the direction of the basket of currencies.

September U.S. Dollar Index futures settled at 93.769, down 0.58 or -0.61%.

If you recall, during the week-ending June 29, the dollar was being driven to nearly one-year highs as conflicting signals about developments in the trade row between Washington and its major partners in China and the European Union prompted buying of the currency, with some of the support for the Greenback being fueled by half-year end rebalancing flows.

While the Dollar Index may have reached its high for 2018 on June 28, the weakness this week was initially fueled by a steep sell-off on June 29. On that date, European Union leaders reached an agreement on migration that eased pressure on German Chancellor Angela Merkel.

The settling of the political turmoil in Italy and the EU accord in June helped create enough positive sentiment to form a solid support base. With the foundation built, all it took was strong Euro Zone economic data last week to chase out the weak shorts and to attract aggressive speculative buyers.

At the end of the week, the EUR/USD finished at 1.1744, up 0.0060 or +0.52%. The rally in the Euro late in the week was triggered by strong German industrial orders, which jumped after four consecutive monthly drops. According to the Federal Statistics Office, orders rose 2.6 percent after an upwardly revised drop of 1.6 percent the previous month. The latest reading beat the forecast for a 1.1 percent rise.

Beside the rising Euro, the U.S. Dollar was also pressured against other currencies because weaker-than-expected U.S. jobs data lowered the chances of a fourth rate hike this year.

On Friday, the U.S. Labor Department said the economy created more jobs than expected in June, but the closely watched inflation gauge – Average Hourly Earnings – rose less than forecast and the unemployment rate increased.

As a result, expectations of a fourth rate hike later this year declined. According to the Fed Funds Indicator, investors priced in a 77 percent chance of a September rate hike, down from 80 percent before the jobs data.

So while a September rate hike is still a likely event, traders feel that without an acceleration of wage growth, a fourth hike at the end of the year is a more difficult call and the futures market shows that traders are putting the odds of a December rate hike at about 50 percent.

In other news, concerns over a fourth rate hike in 2018 and safe-haven buying due to the escalation of the trade dispute between the United States and China, drove U.S. Treasury yields lower. This made the U.S. Dollar a less attractive investment against the Australian, New Zealand and Canadian Dollars. Additionally, the tightening of the spread between U.S. Government bond yields and Japanese Government bond yields, pressured the USD/JPY last week.

This article was originally posted on FX Empire