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CURRENCIES : Dollar Falls Further As Mnuchin Defends Weak Buck Comments

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01/25/2018 | 11:56am CET

By Sara Sjolin, MarketWatch

Euro rises ahead of ECB meeting

Traders continued to dump the dollar on Thursday, with a key index for the buck sinking to a fresh three-year low after U.S. Treasury Secretary Steven Mnuchin defended his comments that he welcomes a weaker currency.

What are currencies doing?

The ICE U.S. Dollar Index gave up 0.2% to 89.036, adding to a 1% loss from Wednesday and falling for a fourth straight day.

The euro rose to $1.2421 from $1.2410 late Wednesday in New York, trading at its highest level in more than three years.

The pound changed hands at $1.4263, up from $1.4238 on Wednesday. Sterling briefly topped $1.43 earlier in the Thursday's session.

The greenback also suffered against the yen , buying Yen109.06 compared with Yen109.22 on Wednesday.

What's driving the market?

Speaking at the World Economic Forum in Davos, Switzerland, Treasury Secretary Mnuchin defended his comments from Wednesday that a weak greenback is good for U.S. trade.

"I thought my comment on the dollar was actually quite clear yesterday," Mnuchin said, according to media reports (https://www.bloomberg.com/news/articles/2018-01-25/trump-set-to-land-with-america-first-message-davos-update). "I thought it was balanced and consistent with what I said before."

In a Davos panel on Thursday, Mnuchin also said he longer term fundamentally believes in the "in the strength of the dollar." (https://www.cnbc.com/2018/01/25/steven-mnuchin-says-he-fundamentally-believes-in-the-strength-of-the-dollar-in-the-long-term.html)

The comments on Wednesday kicked off a sharp selloff in the dollar, as the endorsement of a weak buck was seen as confirmation the U.S. administration is breaking with the traditional "strong dollar policy." A strong greenback can be desirable because it encourages foreign bondholders to buy more U.S. Treasurys and keeps a lid on inflation. On the flip side, a weaker currency can help boost trade as U.S. products then becomes cheaper for other trading partners that hold other currencies, such as the pound, euro and yen.

Investors were also keeping an eye on the euro ahead of the European Central Bank meeting. A string of solid economic data has increased pressure on the policy makers to reign in its ultra-loose monetary policy, but stubbornly low inflation has proven a challenge for the ECB. Analysts expect no changes at Thursday's meeting and that ECB President Mario Draghi will try and talk down the euro.

The rate decision is out at 12:45 p.m. London time, or 7:45 a.m. Eastern Time, followed by Draghi's press conference at 1:30 p.m. London time, or 8:30 a.m. Eastern.

What are strategists saying?

"The inference of Trump's 'America First' policy is that the U.S. administration would favor a weak USD and comments from U.S. Treasury Mnuchin at Davos this week appear to have removed any lingering doubt," said Jane Foley, senior FX strategist at Rabobank, in a note.

"The timing of Mnuchin's comment on the dollar, just a day ahead of Trump's keenly awaited speech at Davos, is thus bound to raise concerns that the U.S. President could be in the brink of stepping up pressure on the trading partners of the U.S.," she added.

In terms of the ECB meeting, Neil Wilson, senior market analyst at ETX Capital, said the shared currency stands ready to bounce higher or selloff depending on the message from Draghi.

"With EURUSD holding at $1.24 and ready to pounce on any hawkish signs from the ECB to break out to $1.26, the material question for traders is whether the usually-dovish Mario Draghi lands a few choice words to compensate for the relatively hawkish signal from the last meeting minutes," he said.

"The lack of any clear signal about changing the language around forward guidance could be taken as a dovish signal and push EURUSD back down, although near term support should be found easily enough given the ongoing pressure on USD," he added.

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