Dollar recovers as geopolitical risks fade away

Yesterday the US Dollar held to large gains, following a sharp rebound against the Yen and Euro, lifted by improving investor risk sentiment as worries over North Korea and Hurricane Irma receded.

A revival of interest in riskier assets prompted some investors to cut short bets against the Dollar before US inflation data. Despite the bounce, net short bets against the US Dollar remain near their highest levels since January 2013 as expectations of Federal Reserve policy tightening have faded. Currency markets now expect only one US rate increase by the end of 2017, a sharp decline in expectations from a rate hike before the end of this year a few weeks ago.

Meanwhile, the People Bank of China (PBoC) set the daily fix, the midpoint around which the Renminbi can trade 2% in either direction against the Dollar, at Rmb 6.5277, which was 0.4% softer than the previous day and the most significant weakening since January 09.

The decline followed the Chinese currency’s worst day in three months on Monday after the PBoC last Friday dropped a requirement raising the cost of betting on Renminbi depreciation, and scrapped a requirement that banks hold reserves against Renminbi deposits held in Hong Kong.

On Tuesday as well, the Canadian Dollar firmed against its US counterpart, supported by further gains in Canada’s Bond Yields after the country’s Central Bank surprised some investors last week by raising interest rates. A string of robust economic news pushed the Bank of Canada to hike rates for the second time in three months, a move that helped drive the Loonie nearly 2% higher last week.