Dollar marches to 4-month high as oil rally points to higher inflation


The U.S. dollar continued to rise on Monday, hitting its highest level in more than four-months trading as investors gauged what last week’s job data and recent oil price rally could mean for Federal Reserve monetary policy.

A trio of Fed speakers on the docket Monday will be watched for any hints of the future rate path.

What are currencies doing?

The ICE U.S. Dollar Index

DXY, +0.14%

which measures the buck against six rivals, gained 0.2% to 92.745, reaching its highest level since late December. The benchmark last week rose 0.2%, logging a fourth straight weekly advance. The broader WSJ Dollar Index

BUXX, +0.14%

which also included emerging-markets currencies, was up 0.2% at 86.30.

The euro

EURUSD, -0.2926%

 fell to $1.1924 from $1.1963 late Friday in New York, earlier touching its lowest since late December.

The British pound

GBPUSD, +0.2291%

meanwhile, was slightly stronger at $1.3565, versus $1.3532.

The Japanese yen

USDJPY, -0.01%

 also declined, with the buck buying ¥109.17 compared with ¥109.12 on Friday.

The Canadian dollar

USDCAD, +0.0156%

 and Mexican peso

USDMXN, +1.0464%

 were weaker on Monday as yet another round of talks about the North American Free Trade Agreement are kicking off in Washington, D.C. Canada, Mexico and the U.S., the three members of the trade pact, are expected to reach a deal in principle this month.

One U.S. dollar last fetched C$1.2853, up from C$1.2847, as well as 19.4456 pesos, up versus 19.2666 pesos last Friday.

Read: Here’s what traders forget as headlines suggest imminent Nafta deal

Also see: Can Mother’s Day lift the Mexican peso’s spirits?

What is driving the market?

The U.S. dollar started the week of on stronger footing, while the U.K. was out for a May banking holiday, which somewhat limited trading volumes. The greenback’s main rival, the euro, was dragged lower on Monday, following unexpectedly weak German factory orders in March.

Additionally, a rally in oil prices was seen as potentially boosting U.S. inflation. U.S. crude oil

CLM8, +1.49%

topped $70 a barrel for the first time since 2014 on Monday as traders became more convinced President Donald Trump will abandon the Iran nuclear deal and reimpose sanctions on the country. That would limit Iran’s oil exports and tighten global supply, which would likely lead to a rise in oil prices. As energy is a big part of headline consumer prices, a continued surge in crude prices could further lift U.S. inflation.

Higher inflation would be a key ingredient in the Federal Reserve raising interest rates at a faster pace than currently priced into the dollar’s level. The central bank’s dot plot points at three total hikes this year, including one completed in March.

Friday’s U.S. jobs report, which included an unemployment rate of 3.9%, the lowest level since 2000, also sparked speculation that the labor market was close enough to full capacity that wage inflation soon had to pick up.

What are strategists saying?

“Market participants realize that the recent increase in the commodity’s price—and possibly more gains in light of the U.S. vs. Iran dispute on the nuclear deal—will have to take their toll on U.S. inflation,” said Konstantinos Anthis, head of research at ADS Securities, in a note.

“Higher domestic inflation would be just what the Fed needs in order to tilt towards 3 additional rate increases in 2018. Furthermore, the tighter labor market conditions—as seen on Friday’s data—are also expected to push wage growth higher in the medium term. Higher energy prices and stronger wage growth is almost an ‘one-way road’ to higher inflation which would leave no option to the Fed other than raising rates more aggressively—which explains why the greenback stays on an upwards trajectory,” he added.

“With renewed interest in dollar buying, we could see dollar-yen attempting a move towards the key ¥110 regions,” said Viash Sreemuntoo, corporate trader at online platform, adding that it won’t be a straight line of appreciation in the pair.

What else is in focus?

A trio of Fed members are slated to speak on Monday, which could give further clues to the direction of interest rates. Richmond Federal President Tom Barkin is scheduled to speak at George Mason University in Fairfax, Va., at 2 p.m. Eastern Time.

Chicago Federal Reserve Bank President Charles Evans and Dallas Fed President Robert Kaplan will both speak at the 23rd Annual Financial Markets Conference in Amelia Island, Fla., at 3:30 p.m. Eastern.

The consumer-credit report for March is due at 3 p.m.

See: MarketWatch’s economic calendar

In other assets, U.S. stocks, including the Dow Jones Industrial Average

DJIA, +0.73%

were trading higher midday.

U.S. Treasury yields were mixed, and the 10-year note

TMUBMUSD10Y, +0.33%

 last yielded 2.876%.

Source : MTV