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Dollar’s Extended Rally Comes to a Halt - REUTERS

MAY 18, 2017

Political uncertainty is seen hurting Trump’s ability to keep pledges on fiscal, tax issues

By Chelsey Dulaney

The U.S. dollar erased the postelection rally that sent the currency to its highest level since 2002, in one of the clearest signs that investors have lost faith in the so-called Trump trade.

The ICE U.S. Dollar Index, which gauges the dollar against a basket of six currencies, fell 0.8% late Wednesday in New York to 97.39, as the U.S. currency slid against the euro, Japanese yen and British pound.

The last time the dollar closed lower than that was on Nov. 4, just days before the election of President Donald Trump sent the U.S. currency surging in a broad market rally.

 

Many investors fear that political turbulence in Washington is eroding the administration’s ability to deliver on its tax-overhaul and fiscal-spending proposals. Those plans were expected to boost U.S. economic growth and helped propel the dollar to a 14-year-high after the election.

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“The administration’s ability to push some of these things through over a reasonable time frame may well be compromised,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank.

“It’s certainly conceivable…that the dollar rally has topped out,” he said.

The dollar reached a peak in January, and has been declining steadily since. The currency began to falter early this year after Mr. Trump expressed his desire for a weaker dollar and some of his proposals hit political roadblocks.

Meanwhile, U.S. inflation and gross-domestic-product data have raised concerns that the U.S. economy has slowed. That has damped investors’ expectations that the U.S. central bank will stick to its projections for three interest-rate increases this year, pressuring the dollar.

Hedge funds and other speculative investors have dialed back bets on a stronger dollar, which recently dropped to their lowest level since early October.

The dollar’s latest downdraft followed reports that Mr. Trump allegedly asked then-FBI Director James Comey to back off the investigation of former national security adviser Michael Flynn, which prompted some congressional Republicans to call for further investigation.

That came after reports that Mr. Trump had shared sensitive information with Russian officials.

The White House has denied the Comey account and has said the information Mr. Trump shared with the Russians was appropriate.

“This is just a maze of issues beyond what markets would generally like to see happening,” said Mr. Osborne. “That’s clearly undermining the dollar.”

The dollar slid 2% against the Japanese yen, which investors often buy during times of market uncertainty. That is its biggest daily percentage decline since last July. Other assets seen as safe, including the Swiss franc and gold, strengthened.

Vassili Serebriakov, a currency strategist at Crédit Agricole, said investors were looking ahead to central-bank meetings next month for clues on the direction of the dollar.

Markets are pricing in a 65% chance that the Federal Reserve will raise interest rates at its June meeting, CME Group data shows.

“I think that June is still quite likely because the Fed wouldn’t want to disappoint markets,” said Mr. Serebriakov. “But after that, the markets are taking the view that there’s too much uncertainty to price in more tightening.”

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Meanwhile, some investors expect the European Central Bank to signal at its June meeting that it will begin to wind down its quantitative-easing program soon.

“It has become less of a U.S.-centric market,” said Mr. Serebriakov. “The euro has had a very significant shift in momentum, and it’s going to continue.”

While the ICE U.S. Dollar Index has erased its postelection rally, the WSJ Dollar Index, which measures the U.S. currency against 16 others, remains above where its closed on Nov. 8.

Gains in the euro, yen and pound against the dollar have been the biggest contributors to the WSJ Dollar Index’s decline this year.

Investors have been selling U.S. assets to invest abroad, as many of them anticipate an acceleration in growth in Europe, Japan and emerging markets.

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

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