The United States of America dollar dropped on Tuesday, December 2, to its lowest in more than three months, weighed down on the first trading day of 2018 by market expectations of a slower pace of interest rate increases by the Federal Reserve amid a tepid U.S. inflation picture.
The dollar’s upside was also capped as many of the world’s major central banks such as the Bank of England and European Central Bank are moving toward normalizing their own monetary policies.
Some strategists said traders were wary of taking big positions ahead of Wednesday’s scheduled introduction of the wide-ranging EU financial markets directive known as MiFID II, aimed at making European markets more transparent and providing better value for investors.
“Investors remain skeptical about the Fed’s outlook for three additional interest rate increases this year, especially given the extremely benign inflation backdrop in the U.S.,” said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington.
Meanwhile the British Pound Sterling, on December 2, flagged off the first trading day of 2018 by climbing to a three-month high close to $1.36, with investors brushing off weaker-than-expected manufacturing data to focus on upcoming Brexit talks.
It climbed as much as 0.7 percent to $1.3598, its strongest since Sept. 20, as the dollar weakened across the board. The pound, which in 2017 recorded its best annual performance against the dollar since 2009 with an almost 10 percent rise, added to those gains on Tuesday.
“It’s a difficult one to react to because yes it’s a disappointment, but it’s still a stunningly good figure,” said Rabobank currency strategist Jane Foley. “It’s difficult to sell the pound on the back of that number.”
Foley added that German Chancellor Angela Merkel’s success in forming a governing coalition so as to secure a fourth term in office could also be crucial for sterling, because of a market perception that she was something of an ally for Britain and would want to get the country a favourable trade deal.
Exploratory talks between Merkel’s Christian Democrats and the Social Democrats are scheduled from Jan. 7 to Jan 12.
Against the euro, sterling strengthened 0.2 percent to 88.71 pence.
“As always, the course of Brexit negotiations will be important and developments in the coming weeks will be important given we expect a transition deal to be struck quickly,” wrote MUFG currency strategists in a note to clients.
“We remain sterling bulls and continue to expect the pound to break above the $1.40 level,” they added.
Brexit minister David Davis said on Tuesday that Britain wants to include financial services in a trade deal with the European Union which covers a full sweep of economic areas, and that any deal that left out the sector would be “cherry-picking”.