The US dollar erased this year’s losses versus the euro and the outlook for higher relative interest rates might prove strong enough for the greenback to overcome historical patterns that signal its gains are overdone.
The US currency rose for a third week on renewed bets among investors and traders that the US Federal Reserve will find the scope to raise rates by December.
At the same time, European Central Bank (ECB) President Mario Draghi sought to put a halt to speculation that monetary stimulus will be tapered anytime soon, helping extend the US dollar’s rally versus the euro and pushing its relative strength against the shared currency beyond levels that often signal an impending reversal.
The US dollar this week added 0.8 percent to US$1.0884 per euro, leaving the greenback up 0.2 percent for the year. The currency was down more than 5 percent as recently as May.
The Bloomberg Dollar Spot Index, which tracks the US dollar against 10 major peers, rose 0.1 percent this week, paring its loss this year to 2.1 percent.
The euro’s relative strength index versus the US dollar on Friday fell to about 28, crossing below the 30 level that often signals a move might be overextended. The last time it breached 30 was in November last year.
The pound might be experiencing a period of relative stability, but the signs are that it is an uneasy calm that traders should not get complacent about.
While sterling rose this week for the first time since last month, it fell as much as 0.6 percent on Thursday after EU President Donald Tusk said there will be no pre-negotiations before Britain triggers divorce proceedings.
Implied six-month volatility for the pound-US dollar rate dropped 0.5 percentage point this week to 11.7 percent, the first decline in more than a month, data compiled by Bloomberg show.
In Taipei, the New Taiwan dollar on Friday fell NT$0.1 against the greenback to close at NT$31.630. Despite the daily loss, the NT dollar this week rose NT$0.042, or 0.13 percent, against the US dollar from last week’s NT$31.672 .
The US dollar has been on the rise since the middle of August as signals of faster economic growth and accelerating inflation fueled bets for US monetary tightening.
The currency reached a seven-month high this week after US retail sales data bolstered the case for higher interest rates this year.
Futures show a 68 percent chance the US central bank will raise rates by year-end, based on the assumption that the effective funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.
Meanwhile, the euro has been under pressure from the accommodative policies of the ECB, as well as political risks ranging from post-Brexit fallout to a migration crisis to a referendum that might topple Italy’s government.
Additional reporting by CNA
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