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Dollar eyes worst first 7-month start in 31 years

The dollar is on track for its worst seven-month start to the year in over three decades as a more hawkish European Central Bank and growing legislative dysfunction in Washington dim the buck’s appeal as a haven currency.

The DXY index, a measure of the greenback against a basket of major foreign currencies, is set to end July down 2.7 per cent. This will mark the gauge’s fifth consecutive month of declines and take its losses so far this year to 9 per cent.

The last time the index endured such a weak start was in 1986, when it suffered a 12.5 per cent drop in the first seven months of the year, according to Bloomberg data.

The dollar has been particularly hard hit by the rise in the euro. The common currency has surged more than 12 per cent against the dollar so far this year and hit a two-and-a-half year high of $1.1832 on Monday.

Elsewhere, the pound strengthened above the $1.32 mark on Monday for the first time since last September, and the Mexican peso rallied to a near 15-month high of 17.45 against the dollar earlier this month.

In a 29-page note ominously titled “The Big USD Short”, analysts at Credit Suisse attributed the dollar’s ongoing weakness to a confluence of factors: the difficult start to Donald Trump’s presidency and the fading prospects for tax reform and fiscal stimulus that Wall Street had been betting on; more dovish comments from the Fed on inflation, which suggest policymakers would take a more cautious approach to any further monetary tightening; a more hawkish ECB and better-than-expected eurozone growth.

The bank reckons the euro will strength above the $1.19 mark over the next three months and trade as high as $1.22 over the next year.

“US political outcomes have underperformed even our own low expectations,” Credit Suisse said. “Although healthcare reform prospects are still alive, even legislators appear to have little idea of what final shape they will take.”