The dollar index, a barometer of investors’ reflation expectations for the US economy, fell on Monday to trade at its lowest level since the presidential election, signalling that the so-called Trump trade is nearing the point of being fully unwound.
Measuring the reserve currency’s performance against a basket of its peers, the dollar index fell more than half a per cent to 99.038, a level last seen on November 11. As the dollar waned, global equities were also under pressure while havens such as the yen, gold and government bonds attracted buyers.
Rodrigo Catril, forex analyst for National Australia Bank, said “the Trump-specific boost to the US dollar and commodity prices . . . is at risk of completely unwinding”.
The dollar has come under increasing pressure since it peaked at the start of the year, and last week’s collapse of the president’s healthcare bill intensified selling of the currency on Monday.
The weakness in the currency reflects doubt over the Trump administration’s fiscal plans to boost the economy and whether the Federal Reserve will tighten policy at a faster pace in the coming year. Lower bond yields on Monday also contributed to the weaker tone for the dollar as markets reflected a sense that the Trump administration faces a challenge passing tax reform and fiscal stimulus measures through Congress.
Simon Derrick, chief market strategist at BNY Mellon, said “failure to pass the healthcare bill will probably prompt investors to question whether tax reform will prove any easier’’. He said higher bond yields were one of the key drivers of the dollar’s post-election rise.
“As such, it is perfectly possible that the week will see yields moderate further and the dollar resume its push lower,’’ he added.
The dollar was particularly weak against the yen and the pound, down more than 1 per cent in both cases, and three-quarters of a per cent lower against the euro.
Emerging market currencies also benefited from the dollar sell-off, although weak commodity prices kept some parts of EM forex in check. The Korean won was up 0.8 per cent, while the Taiwanese dollar rose 0.7 per cent.
The Swiss franc, a traditional haven when the market is risk-averse, rose 0.6 per cent, while gold was up 1.1 per cent and Asian and European equities retreated.
Markets including the dollar index had briefly risen late on Friday in the hope that the White House could begin to focus on tax reform, a key element of the Trump trade.
But Sue Trinh, Asian forex strategist at RBC Capital Markets, said this optimism “gave way to the realisation very big’ tax cuts were highly dependent on the savings from replacing Obamacare”.
That could raise concern among fiscally prudent conservatives, said MUFG’s Lee Hardman. “In these circumstances, the US dollar is likely to remain offered for now with no obvious trigger to reverse current negative sentiment in the week ahead,” he said.
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