November 12, 2018 / 1:37 AM / 7 months ago

Dollar hits 16-month peak; Brexit fears sink pound

NEW YORK (Reuters) - The dollar reached a 16-month high against a basket of currencies on Monday as investors built bets on a Federal Reserve interest rate increase next month, and political risks in Europe put pressure on the euro and the pound.

FILE PHOTO: A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

Fears about a no-deal Brexit and a growing rift in Europe over Italy’s budget have also boosted the dollar.

Last Tuesday’s U.S. elections produced a split control of Congress that suggested more fiscal stimulus measures are unlikely, sparking a wave of selling in the dollar.

The greenback has since recovered on the Fed’s signal that it would hike key lending rates further as the U.S. economic expansion remains on track.

“Rising global uncertainty and a widening U.S. yield differential with other economies provide support, but an elevated valuation may constrain further gains,” Richard Turnill, global chief investment strategist with BlackRock wrote in a research note on Monday.

Net long positions on the dollar versus G10 currencies last week rose to their highest levels since 2015 at $30.4 billion, according to CFTC data. NETUSDG10=

GRAPHIC: CFTC U.S. dollar positioning -

An index that tracks the dollar against the euro, yen, sterling and three other currencies .DXY was up 0.64 percent at 97.527. It reached 97.578 earlier Monday, which was the highest since June 2017.

The dollar index's rise was capped by a sharp selloff on Wall Street where the S&P 500 .SPX lost 1.21 percent.

U.S. trading was muted by the U.S. Veterans Day holiday. While Wall Street and currency markets were open for business, the U.S. bond market was closed.

Sterling GBP=D3 fell as doubts grew over Prime Minister Theresa May's ability to get the backing of the EU and her own party for any Brexit deal.

With less than five months before Britain is due to leave the EU on March 29, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and EU member Ireland.

The pound was down 0.98 percent at $1.2852 and the euro was marginally lower against the pound at 87.455 pence.

The euro was knocked back by concerns about Rome’s tension with the European Commission over its 2019 budget and weakness in Italy’s banking sector.

“Italy has catastrophic risk written all over it,” Scott Minerd, global chief investment officer at Guggenheim Partners, said at the Reuters Global Investment Outlook Summit, on Monday.

The single currency fell 0.82 percent versus the dollar to its lowest since June 2017 at $1.124. EUR=EBS.

Additional reporting by Tom Finn in London and; Vatsal Srivastava in Singapore; Editing by Alistair Bell and Andrea Ricci

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