Currencies: Dollar hits 2-month low as euro extends gains

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The U.S. dollar fell to its lowest since Sept. 25 and was on track for a third weekly loss in a row on Friday, driven by a rallying euro and concerns that the Federal Reserve may be hesitant to deliver further interest-rate increases due to stubbornly low inflation.

Overall, trading is light in the wake of the U.S.’s Thanksgiving holiday on Thursday and an abbreviated schedule for U.S. markets Friday.

Where are currencies trading?

The ICE U.S. Dollar Index DXY, -0.38%  fell 0.6% to 92.691, a two-month low, adding on from losses it incurred earlier in the week. The index is under way for a 1% loss this week. The WSJ U.S. Dollar Index BUXX, -0.16% which measures the buck against a broader range of currencies, was 0.2% weaker at 86.36, its lowest since mid-October.

The euro EURUSD, +0.7342%  was the driving force behind dollar weakness, rising to $1.1939 up from $1.1850 late Thursday. This marked the first break through the $1.19 level for the common currency since late September. The euro is on track for a 1.2% gain this week.

Against the Japanese yen USDJPY, +0.28% the dollar edged up slightly on Friday, after hitting a two-month low earlier in the week. One dollar last bought ¥111.57, up from ¥111.21 on Thursday. For the week, the pair is down 0.5%.

The British pound GBPUSD, +0.1578%  also gained against the greenback, buying $1.3349, versus $1.3307, despite low consumer-confidence data for November. Sterling’s weekly performance is on track for a 1% gain.

What is driving the market?

For dollar traders, Wednesday’s Federal Open Market Committee minutes, which showed policy makers’ concerns about stubbornly low inflation, remained a key focus. The notes raised doubts about how many times the Fed will increase interest rates in 2018. Higher rates tend to be supportive for a currency, making it an attractive place for investors to park money.

The euro’s strength came on the back of better-than-expected German Ifo indicators, which added on from Thursday’s positive November flash PMI readings. In Europe’s latest political wobbles—German Chancellor Angela Merkel’s struggle to build a coalition for her next administration—a resolution could be in sight, as the Social Democrats were opening up to the possibility of negotiations. The Ifo indexes are a closely watched measure of sentiment in the eurozone’s largest economy.

Previously, the SPD, which is the main rival party of Merkel’s Christian Democrats, said it wasn’t going to enter another coalition but opt for new elections to resolve the impasse.

Read: Here’s what Germany’s political turmoil means for global markets

Also read: Here’s why German political turmoil could hurt sterling more than euro

What are strategists saying?

“I am aware that I can get a little carried away. And I realize that this is all ‘soft data’. Nevertheless, I think this data is sensational. It suggests economic momentum in the eurozone continues to build and it increases the chances that 2018 will also be a good year for economic growth,” said Han de Jong, chief economist at ABN Amro said, speaking to the supportive eurozone PMI data and German sentiment.

“It has certainly been another painful week for the U.S. dollar which has found itself at the mercy of low inflation concerns,” wrote Lukman Otunuga, research analyst at FXTM. “With uncertainty likely to mount over the US rate outlook beyond 2017, amid Fed inflation concerns, it could translate into more pain for the dollar.”

What are the data saying?

Markets had limited reaction to lower-rung U.S. data. The November reading for Markit’s flash services PMI came in at 54.3, down from 54.6 in October. Similarly the flash manufacturing PMI slipped to 53.8 from 54.6 before. A reading of 50 or above indicates improving conditions.