U.S. Dollar Hit by Perfect Storm of Negativity

The U.S. Dollar was pressured last week by a combination of factors including a major decision by the Bank of Japan, a rumor that China was going to slow down its purchases of U.S. Treasurys, weak producer prices and a soaring Euro.

For the week, March U.S. Dollar Index futures settled at 90.735, down 0.938 or -1.02%.

The week started with the dollar underpinned by rising U.S. Treasury yields and optimism over the Fed’s forecast to raise interest rates three times in 2018 after the release of the U.S. Non-Farm Payrolls report on January 5.

The dollar began to retreat from its high for the week after the Bank of Japan said it will trim its purchases of Japanese government bonds and U.S. corporate debt. The Japanese announcement raised speculation the country’s central bank may wind down its monetary stimulus this year.

Traders said that although the move was in line with the BOJ’s planned reaction in bond buying, it highlights the sensitivity of markets to global monetary policy.

The dollar declined further following a Bloomberg News report that cited unnamed sources are saying that officials in Beijing have recommended China, the largest holder of U.S. Treasurys, to slow or even halt its purchases of that debt. Later in the week, China’s foreign exchange regulator publicly refuted the Bloomberg report on Thursday, saying it cited “false information.” However, the damage was done.

The U.S. Dollar was also driven lower after U.S. producer prices fell for the first time in nearly 1-1/2 years in December amid declining costs for services.

A sharp rise in the Euro did most of the damage to the U.S. Dollar Index despite a report that showed U.S. core consumer prices posted their biggest gain in 11 months.

The dollar plunged to a more than three-year low against the Euro on Friday, as the common currency extended its gains on hopes that European Central Bank policymakers are preparing to reduce their vast monetary stimulus program.

AUD/USD

The Australian Dollar was boosted last week by the steep drop in the U.S. Dollar and after stronger-than-expected November retail sales added to the view that consumer spending is picking up and fueling Aussie growth.

The AUD/USD settled at .7911, up 0.0049 or +0.62%.

The Australian Dollar climbed after Australian Bureau of Statistics figures showed retail sales rose 1.2 percent in November from October versus an expected 0.4 percent. It was the steepest gain since 2013 and was driven by sales and the release of the iPhone X.

USD/JPY

The Dollar/Yen Forex pair was the biggest loser last week as buyers jumped on the long side of the Japanese Yen amid speculation the Bank of Japan was preparing to begin winding down its monetary stimulus this year. After the initial selling spree early in the week, the move accelerated, helped by the European Central Bank minutes which suggested the central bank was preparing to join other central banks in tightening monetary policy.

The USD/JPY settled at 110.997, down 2.042 or -1.81%.