The dollar remained unloved on Monday, sinking to a fresh three-year low against the euro and a four-month trough versus the yen, although activity in the markets was subdued by the Martin Luther King Day holiday in the US.
The US currency has come under mounting pressure recently as signs of strengthening global growth have fuelled speculation that central banks outside the US could begin removing policy accommodation.
"In an example of how strangely markets work, the existing tightening programme by the Federal Reserve is ignored as everyone rushes to find the next central bank to begin tightening efforts," said Chris Beauchamp, chief market analyst at IG.
Furthermore, political developments in the euro zone have provided further support for the euro.
“Dollar weakness is increasingly being driven by events outside of the US,” said the currency strategy team at Morgan Stanley. “In Germany the agreement for formal negotiations between [Angela] Merkel’s CDU party and the SPD may have improved the outlook for the single currency union, adding to euro/dollar’s upside momentum.
"Hawkish commentary from the European Central Bank has pushed euro/dollar above 1.2092, and it is now at the highest level since before the ECB started its quantitative easing programme in 2015."
Indeed, the euro rose as high as $1.2296 before easing back to $1.2268, still up 0.7 per cent on the day.
Fresh support for the single currency came late in the day when Ardo Hansson, the head of Estonia’s central bank, was reported as saying the ECB could end its bond-purchase scheme in one step after September if the economy and inflation develop as it currently expects.
Adjusting policy
Meanwhile, the dollar was down 0.6 per cent against the yen at ¥110.36, the lowest since mid-September.
“The Bank of Japan [governor Haruhiko] Kuroda’s comments on adjusting policy when inflation moves towards target – and not including a reference to ‘aggressive, powerful easing’ – has set the tone that allows the yen to strengthen,” Morgan Stanley said.
Sterling also remained on the ascendant against the dollar – extending Friday’s strong rise by a further 0.6 per cent to $1.3804 – as participants continued to digest a report that the Spanish and Dutch finance ministers had indicated they were prepared to back a “soft Brexit” deal for the UK.
That was the UK currency’s first break above $1.38 since the vote on leaving the EU in July 2016. The euro was 0.1 per cent firmer against the pound at £0.8888.
"Judging by sterling's rally since late November, which has continued in the first few weeks of the new year, a reassessment of the Brexit political games looks to be under way," said Viraj Patel, foreign exchange strategist at ING. –Copyright The Financial Times Limited 2018
