U.S. Dollar Supported by Dovish Central Bank Activity

Since the Euro carries the greatest weight in the dollar index, it gave the index the greatest boost. The BOE warned that Europe’s financial system faces “potential risks” to its stability arising from a no-deal Brexit. The U.S. Dollar strengthened against the Canadian Dollar after the Bank of Canada (BOC) left its overnight rate at 1.75 percent as expected, citing a slowdown in the global, as well as Canadian economies.
James Hyerczyk
U.S. Dollar Index

The U.S. Dollar posted a strong gain against a basket of currencies last week despite Friday’s weaker session. The rally to a multi-year high was primarily triggered by a plunge in the Euro. Other major currencies that contributed to the dollar’s strength were the weaker British Pound and Canadian Dollar. Helping to limit the dollar’s gains were the safe-haven Japanese Yen and Swiss Franc.

If you recall, the U.S. Dollar Index is “an index of value of the United States dollar relative to a basket of foreign currencies. The basket is a weighted geometric mean of the dollar’s value relative to the following select currencies.”

“The Euro is weighted 57.6%, the Japanese Yen is 13.6%, the British Pound is 11.9%, the Canadian Dollar is 9.1%, the Swiss Franc is 3.6% and the Swedish Krona is weighted 4.2%.”

As you can see, the Australian and New Zealand Dollars are not a part of the index.

Central Bank Decisions Behind Dollar Index Strength

European Central Bank

Since the Euro carries the greatest weight in the dollar index, it gave the index the greatest boost. This surge was fueled by the European Central Bank’s decision to stimulate bank lending in the Euro Zone last Thursday, as well as pushing back the timing of the first rate hike.

“A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years,” the central bank said in a statement.

The TLTROs are loans that the ECB provides at cheap rates to banks in the Euro area. The central bank’s decision comes at a time when there are increasing concerns about growth in the Euro Zone. ECB President Mario Draghi also cited a series of external risks as a reason for the new measures.

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment,” Draghi told reporters Thursday.

The ECB also kept interest rates unchanged Thursday but updated its guidance for a rate hike. The ECB had previously said that rates would remain at these levels through to the end of summer, but Thursday, it said it now expects its key interest rates “to remain at their present levels at least through the end of 2019.”

Bank of England

Last week, the Bank of England made remarks in minutes from its Financial Policy Committee (FPC) meeting that was held on February 26.

The BOE warned that Europe’s financial system faces “potential risks” to its stability arising from a no-deal Brexit. With just 24 days to go until Britain is set to leave the European Union, the BOE said businesses and households across Britain and the EU were vulnerable.

The BOE also warned that “some disruption to cross-border services is possible and, in the absence of other actions by EU authorities some potential risks to financial stability remain.”

“Although these would primarily affect EU households and businesses, they could also be expected to spill back to the UK in ways that cannot be fully anticipated and mitigated,” it added in a statement.

The BOE also said on Tuesday that it was further stepping up its lending facilities for commercial banks over the next few months.

Bank of Canada

The U.S. Dollar strengthened against the Canadian Dollar after the Bank of Canada (BOC) left its overnight rate at 1.75 percent as expected, citing a slowdown in the global, as well as Canadian economies.

“Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report,” said the Bank in a statement announcing the rate hold. “While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.”

The USD/CAD rose as investors reduced the odds of further BOC rate hikes later this year. In 2018, the central bank suggested it would be aggressive in raising the rate throughout 2019, but it now looks as if the Bank will not make another rate move until the fall, with some experts suggesting the Bank could lower the rate.

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