Dollar Trims Losses Ahead Of The Weekend

The US dollar is firmer against most major and emerging market currencies to pare this week’s decline. There are three notable exceptions,and they are all in Asia. For all practical purposes, the dollar is flat against the Japanese yen near JPY11.30.

The South Korean won is up almost 1% to extend this week’s pace-setting the gain to 2.65%. The dollar has fallen 7.2% against the won since it peaked at the end of last month. The Taiwanese dollar is 0.6% higher, which essentially doubles this week’s gains. 

While the generally weaker dollar has been a factor, another driver has been the foreign equity purchases. Today’s gains are negligible; the MSCI Asia-Pacific Index is up 14.8% since mid-February. Foreign investors have been significant buyers of Korean and Taiwanese shares. Both have seen around $1.2 bln in foreign equity purchases this week.

This turned the balance in Korea so that this year foreigners have been small net buyers. The turn for Taiwan came earlier.Foreigners have purchased nearly $3.2 bln Taiwanese shares this year.In comparison, foreign investors have sold $51 bln Japanese shares and $1.1 bln Indian shares this year.   

Comments by the ECB’s Draghi and Praet may have encouraged consolidation in the euro ahead of the weekend. While acknowledging limits to what monetary policy can achieve, the idea is that the ECB is prepared to do more if necessary. The wire quotes suggest an attempt to soft the claim that policy rates have bottomed. Recall it was that comment by Draghi during his press conference that turned euro (and other markets) around, sending it higher. 

Add a less aggressive trajectory of the Fed’s dot plot and you have the euro testing the February high near $1.1375. To be anything of note, the euro needs to fall back below $1.1235, and ideally $1.1200. The US 2-year premium over Germany has fallen 10 bp this week to 1.32%.