The dollar rose to a fresh 11-month high and the euro sagged towards its 2018 lows on Thursday as investors increased their bets on a prolonged period of monetary policy divergence between the US and European central banks.

Concerns over an escalation in a US-China trade conflict, underlined by comments from top central bankers on Wednesday, have also boosted the dollar as traders reckon a more serious dispute would be inflationary for the US economy, forcing the Federal Reserve to tighten rates further.

“We are really seeing divergence in monetary policy in the euro zone and the US for many months to come,” said Esther Reichelt, a currencies analyst at Commerzbank in Frankfurt.

“This general sentiment has not been fully priced into the market.”

The dollar index against a group of six major currencies rose 0.3 per cent to 95.406, its highest since mid-July 2017.

Buoying the greenback, long-term Treasury yields also bounced back from three-week lows. Those yields were propped up by remarks from Fed Chairman Jerome Powell, who had said on Wednesday that the US central bank should continue with a gradual pace of rate increases.

The euro fell 0.2 per cent to $1.1548, close to its 11-month weak point of $1.1531 hit last week. The dollar rose 0.2 per cent to 110.6 yen, moving further ahead from a one-week low of 109.55 struck on Tuesday.

Elsewhere the pound hit a new 7-month low ahead of the Bank of England policy meeting, at which the central bank is expected to keep rates on hold.

The Swiss National Bank kept its negative interest rate on hold on Thursday, as expected, and the franc was unmoved . Norway's central bank will also give its policy decision later on Thursday.

The New Zealand dollar retreated to a six-month low of $0.6838 after domestic data that showed slowing first quarter economic growth boosted expectations that the central bank would keep interest rates low.

The Mexican peso climbed more than 0.8 per cent overnight, helped by expectations that the country's central bank will raise interest rates on Thursday. It later gave up some of those gains.

The peso has extended a rebound from 1-1/2-year low it hit last week when it was dented by a broad dollar rally, a deadlock in talks around the NAFTA free trade deal and nervousness ahead of Mexico's July 1 presidential election.

In contrast, Brazil's real was flat despite the country's central bank refraining from tightening monetary policy again on Wednesday. The real has lost 5 per cent this month and brushed its lowest level since March 2016.

The tariff feud between China and the United States has added to woes for emerging markets, already under pressure due to steadily rising US interest rates.

“The decline by emerging market currencies and stocks has been a key risk-off theme over the past few weeks, only offset by positive effects US tax cuts are having on the global economy,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

Related Topics
comment COMMENT NOW