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Trump Slump: Dollar still sinking

Gridlock in Washington, slower economic data and fund flows moving back into European assets: It’s not a good look for the dollar, with the index tracking the world’s reserve currency mired at levels last seen before the election of Donald Trump.

Expectations for a reflationary package of tax cuts and fiscal stimulus that followed the president into office are floundering, as the administration’s inability to repeal Obamacare leaves them dashed and the dollar looking especially vulnerable.

The currency is falling against its developed world peers, as well as across emerging markets, with only the pound bucking the trend after UK inflation data missed forecasts.

Lee Hardman, a currency analyst at MUFG, called the events in Washington “a significant blow,” pointing out that the dollar “had already been left vulnerable by building expectations that the Fed will slow the pace of monetary tightening by potentially delaying the next rate hike until next year.”

The euro is established back above $1.15, up 0.65 per cent at $1.1553, while the yen has strengthened past Y112 per dollar for the first time in two weeks, before settling up 0.3 per cent at Y112.27. That comes even as the Bank of Japan looks set to underline its status as the world’s most dovish central bank at its meeting on Thursday, when it is expected to underline its commitment to economic stimulus.

The Australian dollar strode 1.6 per cent higher to $0.7924 and a two-year peak after minutes from its central bank’s June meeting included a surprisingly upbeat assessment of the economy.

Emerging market currencies are in vogue, with the dollar being used as a funding currency for carry trades, where investors borrow in lower-rate currencies to fund bets in higher-yielding alternatives. Among them, the South African rand strengthened by as much as 1 per cent to R12.90 per dollar. Russia’s rouble is 0.4 per cent firmer at Rbs59.11 per dollar Korea’s won rose 0.5 per cent, to Won1,127.30 per dollar.

“The dollar will struggle to find buyers for the time being,” said Stephen Gallo, European head of FX strategy at the Bank of Montreal.

“There is just too much pessimism and uncertainty in the way. FX investors will simply not shift to pricing in real progress on the budget, debt ceiling and corporate tax reform while the healthcare bill is still basically in limbo. “