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USD: Dollar index makes third attempt at 88.00

H.S. Borji
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The dollar bulls were back in control Friday, as the greenback rose to fresh highs against a basket of currencies amid signs the European Central Bank was planning to expand its monetary easing program to rev up the sagging euro area economy.

The US dollar index, a weighted average of the greenback against a basket of currencies that includes the euro, yen, pound, loonie, franc and krona, rose 0.61 percent to 88.12. This is the third time the dollar bulls have taken a run at the 88.00 level. The fundamentals support a bigger leap, while the technical picture also suggests the index could make a decisive break above the 88.00 level. A clean break above 88.00 could expose 90.00, the high from 2006.

A reading of 90.00 on the US dollar index would likely translate into a fall to 1.20 for the EURUSD and 1.55 for the GBPUSD according to analysts.

The United States had no major releases Friday after a mixed week of economic data. The week’s biggest release came Wednesday when the Federal Reserve published the minutes of the October 28-9 Federal Open Market Committee policy meetings. The minutes gave no precise clues about when policymakers would begin normalizing monetary policy, but suggested the decision to end quantitative easing was an easy one.

“[A]ll members but one supported concluding the Committee’s asset purchase program at the end of October,” the minutes read.

By contrast, the European Central Bank appears poised to expand its stimulus package, as the euro area economy continues to teeter on the brink of deflation. Earlier today ECB President Mario Draghi vowed once again to do whatever it takes to raise inflation and inflation expectations as soon as possible, a sign policymakers were inching closer to buying government bonds.

Describing inflation as “excessively low,” Draghi said the ECB “would step up the pressure and broaden even more than channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

The euro declined sharply as a result, tipping the scale further in the dollar’s favour. The EURUSD plummeted to 1.2397, declining 1.15 percent. That was the pair’s lowest level since November 7.

The dollar also strengthened against the British pound as slower wage growth weighed on income tax receipts, forcing the public sector to borrow more money than forecast. The difference between government spending and income was £7.7 billion in October, the Office for National Statistics reported today. While this was smaller than year-ago levels, economists forecast public sector net borrowing to £6.7 billion.

The GBPUSD declined 0.13 percent to 1.5672. Cable had been supported Thursday after the ONS said retail sales surged in October, rising 0.8 percent. Year-on-year, retail sales increased 4.3 percent, nearly double the rate of September.

The greenback lost ground against its Canadian counterpart after Canada posted its seventh consecutive month of above trend inflation. Canadian consumer prices rose 2.4 percent in the 12 months to October, StatsCan reported today. The USDCAD tumbled 0.6 percent to 1.1236.

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