Dollar gains, but outlook suggests weak trend

The dollar rose against the euro on Friday, boosted by technical factors after the single currency hit key resistance levels, even as the greenback’s outlook remained bleak amid cautious signals from the Federal Reserve about further rate hikes.

“It seems like we’re getting some model and stop-loss buying on the dollar after the euro hit resistance on the upside,” said John Doyle, vice president of dealing and trading at Tempus Inc in Washington.

“The sharpest move was in euro/dollar and it has become this across-the-board buying of the dollar,” he added.

That said, investors remained wary of pushing the dollar a lot higher.

This week’s Fed minutes, which underscored the U.S. central bank’s flexibility on monetary policy, triggered dollar selling that lifted the euro as high as $1.1581 and propelled it past a 100-day moving average for the first time in three months.

Greg Anderson, global head of FX strategy at BMO Capital Markets in New York, said the Fed’s rate outlook was just one factor for the dollar’s weakness so far in January.

The Fed chairman said on Thursday in a forum at the Economic Club of Washington that the U.S. central bank intends to shrink its balance sheet further, suggesting it is not done tightening monetary policy just yet.

Markets, however, are pricing in no further rate hikes by the Fed this year.

Data showing U.S. consumer prices in December fell for the first time in nine months in December had little impact on the market, but it backed the Fed’s cautious stance about raising rates this year.

Aside from the Fed’s dovish rate outlook, Shaun Osborne, chief FX strategist, at Scotiabank in Toronto, cited cyclical, structural and secular trends, which could also pressure the dollar in 2019.

“The outlook for relative central bank policy has reached its climax in terms of offering the U.S. dollar support, and widening fiscal and current account deficits are expected to deliver medium-term weakness in the currency,” Osborne said.

In afternoon trading, the dollar index rose 0.1 percent to 95.660 .DXY, but posted its fourth straight weekly decline.

The euro fell 0.3 percent to $1.1465 EUR=.

The dollar was also slightly higher versus the yen at 108.48 yen JPY=, and up versus the Canadian dollar, which fell 0.3 percent CAD=. The greenback last traded at C$1.3272.

In other trading, the Chinese yuan CNY=CFXS rose to its highest level since late July against the dollar, as China and the United States extended trade talks in Beijing. China also gave recent assurances of further fiscal boosts to its slowing economy, lifting the yuan as well.

Source: Reuters (Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Richard Chang)