December 30, 2016
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U.S. dollar notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo - RTX2V3PI

Dollar Inches Lower into Christmas Lull

By Patrick Graham (Reuters)


LONDON - The dollar headed into the Christmas break on Friday just over half a percent off highs hit after this month's U.S. Federal Reserve meeting, with a handful of second-tier data unlikely to disturb markets already in holiday mode.

With Tokyo absent, the dollar inched down to 117.36 yen <JPY=>, compared with 10-month highs of 118.66 yen a week ago and almost unchanged for the year, having been as low as 99.00 in June.

The euro was also a shade firmer at $1.0448 <EUR=>, having rebounded only modestly from a nearly 14-year low of $1.0350 set earlier in the week.

Many in financial markets are betting on further dollar strength next year, but dealers expect little progress over the next two weeks when most investors will be absent and volumes low.

In support of the yen, the euro and sterling are the scale of their falls over the past six months, tempting short-term players to take profit on those trades.

Both the yen and euro may also be safe havens for capital in the face of security concerns and the risk a Donald Trump White House, while supporting inflation and a repatriation of funds to the United States, may provoke a trade war with China.

The dollar is up more than 7 percent against a basket of currencies since lows hit on U.S. election night in November but has been flat for the past week.

"My overall sense is that we'll start the year eking out further gains from the post-Trump trends, before we get a change of tack," said Societe Generale strategist Kit Juckes.

"I reckon dollar-yen will get as high as it can relatively early in the year, the euro as low as it can by the time of the French elections in May and Treasury yields may get as high as they can sometime soon after that."

The dollar index <DXY> was marginally lower at 103.04, just over half a cent off its 103.65 post-Fed peak.

Bets a Trump Administration and Republican-controlled Congress will push up inflation next year have driven two-year U.S. yields <US2YT=RR> almost two percentage points above their German equivalent, the widest since 2005.

At the same time, the Bank of Japan and European Central Bank are actively working to keep short-term yields negative, suggesting the gap may widen further.

"We still expect a bullish dollar narrative to continue to dominate currency market themes as we enter 2017," said Adam Myers, senior rates and FX strategist with Commonwealth Bank in London.

"We look for renewed euro downside to begin as early as next week (and) a fall below parity during the first quarter."

(Additional reporting by Wayne Cole in Sydney; Editing by Alison Williams and Nigel Stephenson)

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