Did China Cause Dollar Decline?
The dollar behaved differently on Friday, pulling away from the 14-year peak it reached on Thursday. The greenback was dropping further away from the 14-year-high record in early trading in Asia on Monday. What’s the cause?
Several factors can be seen interfering with the dollar rally. Downbeat US housing data, China’s capture of a U.S. underwater survey drone and profit-taking moves by investors are some of them.
US housing numbers disappoint
The Commerce Department reported an 18.7% decline in housing starts to 1.090 million units in November. That compared with October’s 1.340 million units, and economists’ guidance of 1.230 million units.
The U.S. building permits also dropped 4.7% last month to 1.201 million, down from 1.260 in the earlier month. Economists forecast a slight drop in building permits to 1.240 million.
These disappointing housing data made investors doubtful of an accelerated Federal Reserve rate-hike next year. The Fed has guided three rate increases in 2017. The rate adjustment outlook played a crucial part in pushing the greenback to a multiyear high reached last week.
Swifter rate increases make dollar-priced yield-bearing assets more appealing, lifting demand for the dollar. But the downbeat housing report caused investors to worry if the Fed will stick to its rate review plan. At the beginning of 2016, investors were expecting four rate hikes in the year, but the Fed has only recently hiked rates once.
The WSJ Dollar Index, which gauges the strength of the greenback against a basket of 16 other currencies, retreated 0.1% to 93.08 on Friday. The dollar was down against the common currency euro and Japanese yen.
On Monday, the US dollar index, which gauges the strength of the dollar against six trading partners, was last seen at 102.69, below 14-year record of 103.56 reached Thursday.
Seizing of U.S. drone by China
The Friday decline in the dollar and the Monday’s weak opening of the currency can also be linked to the capture of a U.S. underwater drone by the Chinese authorities. Because of the already bad blood between the U.S. President-elect Donald Trump and China, the capture of the drone appeared to add to the already high tension between the countries. That caused wary investors to reduce their exposure to the dollar.
Trump has strongly criticized China’s currency manipulation whereby Beijing devaluates yuan to make Chinese exports cheaper.
The USDCHY edged up 0.4%, and was slightly gaining in early trading in Asia.
The dollar also broadly higher against emerging markets currencies on Friday. But that’s bad news because a stronger dollar increases the credit weight on emerging markets servicing dollar-priced debts.
Profit taking also played a role
Profit taking also weighed on the dollar. Investors moved to lock gains after the greenback rallied to a 14-year peak. Besides the Fed rate hike, expectations of government spending on infrastructure and allowing U.S. multinationals to repatriate overseas profits at a lower tax rate have are also driven demand for the dollar because economic prosperity will yield more benefits for those investing in U.S. assets. But growing demand for U.S. assets has triggered capital flow from emerging markets, threatening economic slowdown overseas. The dollar is expected to match euro early next year.