Dollar given some respite after Trump's July silly season

The US dollar gained against major currencies in morning trading at the start of the week, giving it some respite after a run of weakness inspired by chaos in the White House.

The greenback gained 0.25 per cent against a trade-weighted basket of major currencies, providing some relief to dollar investors after a month of almost continuous falls.

Against the euro, which makes up the largest chunk of trade with the US, the dollar rose by 0.22 per cent at the time of writing, while against the pound it gained 0.11 per cent.

The rally in the dollar follows an extended period during which it has weakened steadily as investor disappointment in American fiscal policy grows. Year-to-date the euro has gained more than 11 per cent against the dollar.

Recent chaos in the White House has only added to the dollar difficulties.

US President Donald Trump was elected on a platform promising a big increase in infrastructure and military spending allied to deep tax cuts for big business and wealthy people. However, so far he has proven unable to pass another signature promise, healthcare reform, prompting investors to doubt whether he can pass far more ambitious tax reforms.

Meanwhile some investors have started to reduce their expectations of the pace of monetary policy tightening, which usually makes the dollar more valuable.

Last week the Federal Reserve’s open markets committee (FOMC) noted the softening inflation outlook, which has cast doubt on the possibility of a third rate hike this year. Federal fund futures purchases currently predict a 45.5 per cent chance of a rate hike by the final meeting of the year in December, according to CME Group calculations.

Prospects for sterling to strengthen this week will hinge on the outlook ahead of the latest Bank of England policy meeting. It will update its projections around the economy and announce its latest monetary policy decision on Thursday at midday.

No action on interest rates is expected, despite recent dissent from some of the rate-setting monetary policy committee suggesting a rate hike may be closer than expected before the last meeting.

Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ, said: “It is still likely too soon to expect the BoE to begin gradually raising interest rates this week. Key swing voters such as governor Carney and deputy governor Broadbent have both signalled that they are not yet ready to begin raising rates.”

He added: “However, we expect the overall tone of the policy meeting to sound hawkish by displaying a more limited tolerance for overshooting inflation.”

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