NEW YORK (Reuters) - The dollar rose to a 16-month high against a basket of major currencies on Tuesday, amid growing signs the United States economy is outperforming its peers.
The dollar index .DXY, which measures the greenback against six major currencies, was 0.4 percent higher at 97.004. Earlier in the session, the index hit a high of 97.02, its strongest since 30 June, 2017.
“It all stems from solid U.S. fundamentals which suggests the U.S. economy is in the best position to weather trade wars,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
On Monday, U.S. President Donald Trump said he thought there would be “a great deal” with China on trade, but warned he had billions of dollars worth of new tariffs ready to be implemented if a deal was not possible.
U.S. consumer confidence rose to an 18-year high in October, driven largely a robust labor market, suggesting strong economic growth could persist in the near term. That follows last week’s data which showed the U.S. economy slowed less than expected in the third quarter.
“The underlying strength of the economy keeps the Fed on track to raise rates again this year and further next year,” said Manimbo.
The euro EUR=, which weakened on Monday on news German Chancellor Angela Merkel would not be seeking re-election as head of the Christian Democrats party, was 0.3 percent lower against the dollar. The euro zone economy grew less than expected in the third quarter.
Part of the dollar’s recent strength was due to year-end dollar funding needs, referring to the need of banks and other institutions to adjust dollar-denominated liabilities and assets on their balance sheets, said Brad Bechtel, managing director FX at Jefferies, in New York.
“We have seen this dynamic play out in the past three years, where the dollar is supported in the fourth quarter,” said Bechtel.
The greenback was 0.5 percent higher against the Japanese yen JPY=, as traders prepared for a Bank of Japan monetary policy meeting due on Wednesday.
With inflation distant from its 2 percent target, the BOJ is set to maintain its massive stimulus program and refrain from making any big change to its policy framework for the time being.
“The BoJ-watching community has become like the famous dog Hachiko, much beloved in Japan, who showed up every day to meet his master’s train even though his master had died a long time before,” Marshall Gittler, chief strategist at ACLS Global, said in a note.
“I doubt if we’re going to get what we’re waiting for this time, either,” Gittler said.
Meanwhile, sterling GBP= added to its losses against the dollar and euro after credit ratings agency Standard & Poor's said a no-deal Brexit would be likely to tip Britain into a recession as long as the downturn that followed the global financial crisis, and investors should no longer ignore this danger.
Reporting by Saqib Iqbal Ahmed; Editing by Bernadette Baum and Marguerita Choy