Currencies: Dollar index shoots to highest level since late 2017 on trade optimism

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The greenback surged anew on Monday, with a key dollar index at its best level since late last year, as investors cheered news that the U.S. and China may be putting an end to a months-long trade dispute.

Meanwhile, the euro remained under pressure on continuing political developments in Italy.

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What are currencies doing

The ICE U.S. Dollar Index DXY, +0.13% which measures the dollar against six rivals, most notably the euro, was up 0.4% at 94.012, which marks a fresh high for 2018 and setting it up for the best finish since November 2017. The index gained 1.2% last week, its best weekly gain since one ending April 27, according to FactSet Research.

The WSJ Dollar Index BUXX, +0.24% a broader measure of the greenback that also includes emerging-markets currencies, was up 0.3% at 87.45, after gaining 1% last week, also the biggest weekly gain since April 27.

The euro EURUSD, -0.1614%  fell against the dollar, changing hands at $1.1724, compared with $1.1771 late Friday.

Elsewhere, the pound GBPUSD, -0.4456%  slid to $1.3406, compared with $1.3466 late Friday. Sterling is now trading around its lowest dollar level since late December.

Against the Japanese yen USDJPY, +0.48% the dollar surged to ¥111.31, from ¥110.75 late Friday.

The Turkish lira was taking a major hit against the dollar on Monday, hitting a fresh record low with the dollar buying 4.5387 lira USDTRY, +1.5807%  compared with 4.4917 late Friday.

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What’s driving currency trade?

Optimism that the U.S. and China can avoid an all-out trade war drove several asset classes higher, including the dollar, global equities, U.S. stock futures and oil prices.

U.S. Treasury Secretary Steven Mnuchin said on Sunday that the Trump administration would put the trade war with China “on hold” while the two countries work on a deal to lower the U.S. trade deficit with that country. Meanwhile, China agreed to buy more U.S. products, but without specifying a dollar amount.

But investors will continue to watch the situation closely as trade representative Robert Lighthizer also released a statement that appeared to contradict Mnuchin saying U.S. officials may still resort to tariffs.

The dollar continued to draw support from elevated bond yields as higher rates can make dollars more attractive to investors. The 10-year Treasury yield TMUBMUSD10Y, -1.45%  was hovering at 3.07%, having touched a seven-year intraday high of 3.126% early Friday.

Climbing rates have been supported by strong economic data, which have fueled the view that the Federal Reserve will adopt an aggressive pace of rate increases, perhaps three further rate increases rather than two in 2018.

The dollar was boosted as well against the euro amid continuing tensions surrounding Italian politics. The country’s two biggest populist parties over the weekend agreed on an outline of their cabinet and are expected to present their prime minister candidate to President Sergio Mattarella later on Monday.

But having promised to challenge Brussels’ budget guidelines and rules on immigration, the coalition is already seen at loggerheads with the European Union. There are concerns the fiscal plans of the two parties involved will cause upheaval for the Italian economy and create a new sovereign debt crisis.

The yield on 10-year Italian government bonds TMBMKIT-10Y, +1.74%  rose 5 basis points to 2.266%, trading around its highest level since July last year.

And the Turkish lira was at the mercy of markets on Monday, tumbling to a fresh record low. Last week, President Recep Tayyip Erdogan stoked worries about the independence of the central bank when he told Bloomberg News in an interview that he would become more involved in monetary policy after his expected re-election in a June 24 snap election.

There are also concerns about the Turkish central bank’s ability to stop the weakness of the lira, with a strong dollar not helping. The lira has tumbled 20% against the dollar this year.

What are strategists saying?

“The China agreement is a big win for USD, because if we look at the various uncertainties that the U.S. faces, trade was far and away the #1 question,” said Marshall Gittler, chief strategist at ACLS Global, in a note to clients.

“With the uncertainty in this policy area down somewhat, the dollar should be able to rally further, especially as uncertainty with regards to the key fiscal and monetary policy areas in Europe has risen in response to the Italian challenge,” he added.

What else is in focus?

The Chicago national activity index for April will be released at 8:30 a.m. Eastern time.

Atlanta Fed President Raphael Bostic, is scheduled to make a speech on welfare economics to the Atlanta Economics Club at 12:15 p.m. Eastern.

Philadelphia Fed President Patrick Harker is expected to take part in a discussion at a Chief Executives Organization event in New York City at 2:15 p.m. Eastern, while Minneapolis Fed President Neel Kashkari is scheduled to take part in a discussion at Michigan’s Bay College at 5:30 p.m. Eastern.