Crude Oil Rally Drives Commodity-Linked Currencies Higher, Pressuring Greenback

The U.S. Dollar surged to an 11-month high against a basket of currencies early last week, but ended the week lower, suggesting the rally may have run its course. Last week, dollar investors reacted to geopolitical events such as the escalating tensions over trade between the United States and China, U.S. economic data and weaker Treasury yields due to a mixed performance in U.S. equity markets.

The dollar rose sharply on June 19 after U.S. President Donald Trump threatened more tariffs on China in an escalating trade dispute investors fear could hurt global growth. Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation.

The Greenback rallied against a basket of currencies as traders bet on an escalating trade war forcing inflation up in the U.S. because of costlier imports, raising the prospect of more interest rate hikes.

Sellers came in to drive the U.S. Dollar from its 11-month high against a basket of major currencies on Thursday on profit-taking fueled by weaker than expected U.S. manufacturing data.

The Philadelphia Federal Reserve’s gauge of U.S. Mid-Atlantic business activity fell to a 1-1/year low, raising concern about the U.S. economy and causing some traders to book profits on bullish dollar bets, analysts said. These traders also said that the Philly Fed miss to the downside was a convenient excuse for traders to book profits.

The dollar index was also pressured late in the week on Friday after a rise in the Euro and commodity-linked currencies rose. The Euro was supported by improved regional economic growth data and new assurances by Italian politicians that their nation would not leave the single currency. The greenback was also pressured as worries about a global trade war subsided after OPEC producers announced a perceived modest increase in oil output.

A nearly 5 percent gain in crude oil drove up demand for the commodity-linked Canadian, Australian and New Zealand Dollars.

USD/JPY

The Dollar/Yen finished lower last week despite an attempt by bullish investors to trigger a breakout to the upside. The USD/JPY was pressured by lower U.S. Treasury yields. They fell on flight-to-safety buying due to global equity market weakness fueled by trade war concerns. Steep losses in global equity markets also drove investors into the safe haven Japanese Yen.

The Bank of Japan released the minutes from its April monetary policy meeting last week. The minutes showed a lone BOJ policymaker said additional easing was needed to accelerate inflation, but most members wanted to keep monetary policy unchanged.

The minutes also showed that no board member submitted a formal proposal for additional easing at the meeting in April, although one member advocated speeding up the economy by taking additional easing measures to boost inflation expectations.

Looking ahead, the BOJ may lower its forecasts for consumer price growth at its next meeting in July but is likely to keep monetary policy on hold.