December 22, 2016 / 9:07 AM / 7 months ago

FOREX-Dollar dips but longer-term rally still seen in play

4 Min Read

(Recasts after start of European trade, changes dateline from previous TOKYO)

* Dollar falls back from a 14-year-high on profit-taking

* Several U.S. economic indicators due Thursday

* Euro shows no impact so far from Monte dei Paschi

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

By Jemima Kelly

LONDON, Dec 22 (Reuters) - The dollar dipped for a second day on Thursday as traders booked profits ahead of a batch of U.S. data later in the day, though the greenback was still trading less than a percent away from a 14-year high touched earlier in the week.

The U.S. currency surged last week when the U.S. Federal Reserve hinted that interest rates would be increased three times in 2017, after its first rate hike in a year, with the dollar index - which measures the greenback against six major peers - hitting its highest since December 2002.

It has gained more than 5 percent since Donald Trump was elected as U.S. president six weeks ago, with investors betting that the president-elect's planned tax cuts and increased spending in areas like infrastructure will boost growth and inflation, leading to higher interest rates.

The dollar edged down 0.1 percent on Thursday, having also fallen around a quarter of a percent on Wednesday. But analysts said this week's moves must be viewed in the context of thin liquidity, and there was no clear evidence to suggest the dollar's rally had run out of steam.

"In the months ahead I'm not seeing any signs that that's turning," said HSBC currency strategist Dominic Bunning, in London.

"What we might be seeing is when you've had such a strong run, like we've seen in the dollar, and you go into a period where liquidity is thin ... people take profit and close out some positions, so I think that's why we're getting some consolidation coming through in the dollar at the moment."

While trade is expected to slow further ahead of Christmas on Sunday, the market's near-term focus is on U.S. economic indicators due on Thursday, including revised GDP for July to September, durable goods orders for November, and weekly initial jobless claims.

"The market is relatively quiet in a holiday mood, but if the U.S. economic data is worse than the market expects, the dollar is likely to be sold further," said Kumiko Ishikawa, FX market analyst at Sony Financial Holdings in Toyko.

The euro was up 0.2 percent at $1.0440, rebounding from $1.0352 on Tuesday, the lowest since January 2003.

However, the common currency could come under pressure as investors contemplate the future of the ailing Monte dei Paschi di Siena bank, Italy's third largest lender, some analysts said.

The world's oldest bank has all but failed to pull off a last-ditch private sector rescue plan, making a state rescue appear to be inevitable, sources said on Wednesday.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Yuzuha Oka in Tokyo; Editing by Alison Williams)

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