Daily Market Update

USD Retraces but Holds Near Historic Highs

December 16, 2016


After an historic rally over the past day and a half, the U.S. dollar opened this morning slightly weaker against its European counterparts. Nevertheless, the greenback remains at historically strong levels. The rally begun late Wednesday after the Federal Reserve’s “dot plot” showed the central bank was slightly more dovish than earlier in the year. The rally continued yesterday and saw the Dollar Index (DYY) reach its highest level since 2002. The dollar touched its strongest level versus the safe-haven yen since February.

The fundamental data also help reinforce the “buck” as consumer inflation continues to build and give the Fed reason for additional rate hikes. This morning’s data disappointed but is unlikely to seriously dent the dollar’s bullish run. Housing starts fell by 18.7% in November, missing an already bearish expectation of a 7.0% contraction. Expect the focus to continue to remain on the Federal Reserve and policy divergence. While the dollar may still have room to improve, it would be prudent to watch for a forceful reversal if U.S. data begins to slip.



The Euro managed to stop the bleeding against the U.S. dollar overnight but remains near historically weak levels against its American counterpart. The common currency broke fresh 13-year lows during yesterday’s session on broad dollar strength and diverging monetary policy. The European Central Bank extended its quantitative easing program last week as the Fed tightened policy for the first time this year on Wednesday.
The Euro may have found minimal support after a report showed service and manufacturing expanded last month.



The British pound was also able to recoup some losses against the U.S. dollar but remains lower than earlier this month. The Bank of England kept rates unchanged yesterday; a day after the U.S. raised interest rates. While the Bank of England said that the Brexit vote had a limited initial effect on consumers, we may soon see proof to the contrary as U.K. companies look to hike prices.

Indeed, the Confederation of British Industry’s December survey shows that manufacturers expect to lift prices by the most in more than five years over the next six months as the pound’s plunge is boosting companies’ costs and forcing them to respond. The CBI said the sterling’s 17% depreciation “continues to ramp up pressure on prices.”

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