Global Themes

The U.S. dollar firmed against its rivals Tuesday and strengthened to nearly two-month highs against the yen. The buck enjoyed modest gains that lifted it above nearly one-month lows earlier this week against the euro, sterling and Canadian dollar. The dollar is drawing support from renewed risks in Europe and a cautiously positive backdrop for world markets that has allowed U.S. Treasury yields to rise, boosting the buck’s attractiveness. Markets are taking comfort from a lack of negative news on the U.S.-China trade dispute, a key factor pressuring the safer yen. Sterling weakened more than a penny below mid-June highs amid heightened political uncertainty in Britain. The weakest German investor optimism in six years served as a reminder of the still-fragile shape of Europe’s biggest economy which played out in a weaker euro. Oil gained but the loonie moderated as markets discounted an expected Canadian interest rate hike tomorrow.


Canada’s dollar nursed a decline on the eve of an expected hike in local interest rates. Canada’s economy appears fit enough to endure higher borrowing rates after recent jobs and inflation data. The market appears more than 90% confident in a rate increase tomorrow to 1.50% from 1.25% which would mark the Bank of Canada’s second hike of the year and fourth since mid-2017. Given the perceived low bar for a rate hike, and the still uncertain outlook for U.S.-Canada trade relations, markets suspect a dovish rate hike this week in which policymakers boost rates but play down expectations of further rises in the months ahead.


Recent gains in the euro unraveled after a gauge of German investor confidence fell more than expected and hit the lowest in 6 years. The data took the shine off news last week of an upturn in German factory growth and served as a reminder of the still weak shape of the bloc’s largest economy. German investor morale dimmed thanks to ongoing trade tensions with the U.S. and political risk at home in the wake of Chancellor Merkel’s migrant crisis.


Political instability in the Britain robbed the pound of its strongest level in nearly a month against the greenback. For now, markets appear to be giving British Prime Minister the benefit of the doubt that she while survive turmoil that ensued after her foreign secretary, Boris Johnson, and Brexit chief, David Davis, resigned this week. Mrs. May’s preference for a softer Brexit in which Britain strives for a close trade relationship with the EU after their divorce has helped to limit falls in sterling. The situation remains fluid and any turn for the worse, such as further cabinet resignations or a leadership challenge to the prime minister, could hasten a significant slide in sterling.


The dollar firmed above its lowest level in nearly a month, boosted by rising risks in Europe which contrast economic stability in the U.S. Solid job growth last week reinforced expectations for faster second quarter growth of around 4% which would be double the first quarter’s pedestrian pace of 2%. Meanwhile, a cautiously positive market backdrop, with most global stocks gaining ground, put upward pressure on U.S. Treasury yields with the 10-year hitting 2.87% from a dip last week below 2.81%, a move that increased the appeal of dollar-denominated assets. The dollar awaits fundamental cues this week in data Thursday on consumer prices and Friday on consumer sentiment. 

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