Political Turmoil, Rate Hike Worries Drive U.S. Dollar Lower

Political turmoil and reduced expectations for numerous Fed rate hikes in 2017 drove the U.S. Dollar sharply lower against all major currencies last week.

June U.S. Dollar index futures finished the week at 97.03, down 2.101 or -2.12%.

The dollar posted sharp losses as investors feeling increasingly nervous over the future of Donald Trump’s U.S. presidency sought safe havens for their money.

Investors from Asia to Europe hit the dollar on reports that investigators were looking at records of numerous undisclosed contacts between the Trump campaign and Russian officials.

Shortly after the election, the dollar surged on the assumption that Trump would boost U.S. growth and inflation with a combination of tax cuts and spending while also encouraging repatriation of foreign-held corporate capital to the United States.

However, that faith in Trump’s ability to run the government and fulfill his campaign promises has steadily evaporated so far this year as the President struggles to deliver the goods.

Also helping to drive the U.S. Dollar lower has been a run of downbeat U.S. economic data in the past month. This news has helped drive U.S. Treasury yields lower, making the dollar a less-attractive investment.

The weak data combined with the political turmoil has casts doubts on the Fed’s ability to act aggressively when raising interest rates in 2017. Although the chances of a Fed rate hike in June have dropped from 95% to 74%, it looks like the current economic weakness and the news is not likely to stop the Fed from hiking its benchmark rate 25 basis points.

However, if the trend continues then investors are likely to continue to reduce expectations for further rises in Federal Reserve interest rates this year.

Japanese Yen

There were no major reports from Japan last week, but the currency rose sharply on increased safe-haven buying. Japanese Yen buyers were particularly driven by the drop in U.S. Treasury yields and a steep decline in U.S. equity indexes.

The USD/JPY settled the week at 111.248, down 2.075 or -1.83%.

Australian Dollar

The Australian Dollar trended higher against its U.S. counterpart most of the week, supported by positive domestic news and a weaker U.S. Dollar. The AUD/USD settled the week at .7454, up 0.0068 or +0.92%.

The Reserve Bank’s Monetary Policy Meeting Minutes reiterated its early monetary policy statement, basically saying that concerns over inflation, housing and the labor market will encourage the central bank to hold interest rates steady over the near-term.

Late in the week, the Forex pair was driven higher by better-than-expected employment data. The unemployment rate fell from 5.9% to 5.7%. The employment change showed the economy added 37.4K jobs in April versus an estimate of 4.5K.

New Zealand Dollar

The New Zealand Dollar was supported by the weaker U.S. Dollar and upbeat economic data. The NZD/USD settled the week at .6925, up 0.0070 or +1.02%.

The New Zealand government reported that quarterly retail sales rose 1.5%, beating the forecast of 1.1% and the previous 0.6% read. Core Retail Sales came in at 1.2%, higher than the 0.9% estimate.

Quarterly Producer Price Input also came in better-than-expected at 0.8%. PPI Output beat its 1.1% estimate with a 1.4% read.

Although the news was positive, it was probably not enough to persuade the Reserve Bank of New Zealand from holding interest rates steady the rest of the year.