The dollar inched higher on Tuesday after a rollercoaster 24 hours which traders say may just be a precursor to three weeks of risk-packed events for the $5 trillion a day currency market.

Widely expected to rise next year on Donald Trump's promised fiscal boost for the US economy, the dollar has peaked and troughed since Thursday's Thanksgiving holiday with the dominant tone some profit-taking on gains since the November 8 election.

But players are also concerned about holding the euro into Sunday's Italian referendum or the yen into a meeting of OPEC producers which could generate a deal that supports oil prices and global appetite for risk. Oil prices were down more than 1 per cent on Tuesday.

Added to that is the scale of the move in global bond prices this month which means there may be significant moves over the next 24 hours to rebalance the values of bonds, equities and particular currencies in major houses' portfolios for month-end.

“A lot of these rotations are going to occur and you'd imagine dollar assets will be sold and yen assets will be bought,” said Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.

“That will dominate tomorrow along with the nervousness around the OPEC meeting. In general we are really loaded for the next three weeks.”

The dollar index, which tracks the greenback against a basket of six major rivals, scaled a nearly 14-year peak of 102.050 on Thursday before profit-taking and oil price jitters brought it back down to earth. It was last at 101.39, up 0.1 per cent on the day.

But that included a half per cent gain to 112.54 yen and a 0.2 per cent rise to $1.0595 per euro.

Price action over the last day suggests those investors betting on a hit to the euro from Sunday's vote in Italy are doing so by buying options contracts that pay out if the currency moves below $1.05 - cheaper in capital and risk terms than holding a cash position in the currency itself.

Worries about Italy's banking system have been mounting ahead of the vote, which could unseat the government of Prime Minister Matteo Renzi and derail his plan to refloat the banks.

However, there are complicated political scenarios that may play out. Some players wonder if Renzi's resignation will be accepted, others whether European authorities will step in quickly to ensure the banks are secure if he loses.

“There is quite a lot of negativity and referendum risk in the price,” said Benson. “So it is possible that Renzi will resign, and the market will rally because there is some kind of bank bailout announced.”

Italian lender Monte dei Paschi di Siena faces more than 8 billion euros of legal claims, and says its weakening liquidity and the potential for more bad loan writedowns are among risks to its 5 billion euro rescue plan.

The dollar is far off the 8-month high of 113.90 it touched on Friday.

Later on Tuesday, investors will look to US third-quarter gross domestic product data as well as readings on consumer confidence and consumption for trading cues. They will be followed by the November employment report on Friday.

“The dollar has been pulling back now in response to volatile oil prices, after rising on expectations of what Trump will do,” said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo.

“Against the yen, it could even fall back to the 110 level, depending on what oil does, and we also have U.S. data this week - although right now, the employment figures seem like a long time away,” he said.

Related Topics
comment COMMENT NOW