Fed And Italy Lift Dollar Tone

We had anticipated that the dollar’s downside correction against the European currencies was over or nearly so and looked for the dollar to find better traction. The Dollar Index held above the previous week’s low. The euro’s high for the week was recorded on Monday near $1.1815.

With the weight of Brexit, sterling was unable to trade above the previous week’s high. The dollar set new highs for the year against the Japanese yen. Among the liquid emerging market currencies, which we have dubbed the BRATS (Brazilian real, Russian rouble, Argentine Peso, Turkish lira, and the South African rand), only the peso fell against the dollar. As a condition for more IMF assistance sooner, it was forced to let the currency float, i.e., sink. The Turkish lira led the EM currency recovery as overtures toward Germany were seen as a constructive development. 

In the week through September 21, the Turkish stock market absorbed the flows out of the bond market, which took some pressure off the currency and the external account showed dramatic improvement (August trade deficit was half the size of the July shortfall), and tourism increased after falling sharply in July.

Dollar Index

The Dollar Index rose for the third consecutive session ahead of the weekend and the technical indicators that we had anticipated turning did so. The MACD and Slow Stochastics have turned higher from oversold conditions. At 95.40, the Dollar Index has recouped half of the decline since the August 15 peak for the year near 97.00. Support near 94.60 should contain downticks if the new momentum is to be maintained. 

Euro

The single currency fell nearly 2.5 cents after the Fed showed that neither trade tensions nor the flattening of yield curve would deter it from raising rates another 100 bp between now and the end of next year and the Italian government made a downpayment on its campaign promises and projected a 2.4% deficit for the next three years. This spooked investors who sold Italian assets and yields leaped.