Currencies: Dollar gauge on track to extend win streak to 5 days, as euro softens on Italian angst

The U.S. dollar early Friday strengthened against most of its major rivals, and notably the euro, as frayed nerves over political developments in Italy put pressure on the euro.

What are currencies doing

The euro EURUSD, -0.1102%  weakened against the dollar, changing hands at $1.1781, compared with $1.1794 late Thursday, marking its lowest level since Dec. 18, according to WSJ Market Data Group. The European unit is on pace for a monthly fall of about 2.4%.

The ICE U.S. Dollar Index DXY, +0.09% meanwhile, was up 0.1% at 93.618, maintaining a 2018 peak and on track to ring up a 1.2% weekly gain, representing its best such stretch since the period ended April 27, according to FactSet data. The index, which measures the buck versus a half-dozen key rivals, is heavily weighted against the euro, 57.6%.

Check out: How much the weak dollar lifted Q1 earnings for multinationals: Ameriprise

The WSJ Dollar Index BUXX, +0.08% which tracks 16 monetary units against the greenback, was up 0.1% to 87.12.

Elsewhere, the British pound GBPUSD, -0.1924%  slipped to $1.3478, compared with $1.3516 late Thursday. However, sterling lost some ground against the euro EURGBP, +0.0687% with the euro buying £0.8740, compared with £0.8728 in the previous session.

Against the Japanese yen USDJPY, +0.16% the dollar extended its gains, buying ¥111.03, from ¥110.77 late Thursday.

Versus the Canadian dollar USDCAD, -0.1171% the U.S. currency bought C$1.2819 from C$1.2810 a day ago. The buck also furthered gains against the Mexican peso USDMXN, +0.1875% fetching 19.7550 pesos, compared with 19.7338 late Thursday.

What’s driving currency trade?

On a fundamental basis, the dollar has enjoyed a modest renaissance in recent trade, with the currency bucked up by an acceleration in the rise of benchmark U.S. government bonds. That’s highlighted by the 10-year Treasury yield climbing above 3.10% this week, and remaining near its highest level since 2011, picking up a sizable 12.9 basis points, or 0.129 percentage point, since the end of last week.

Higher rates can make dollars more attractive for investors. Climbing rates have been supported by strong economic data, which have fueled the view that the Federal Reserve will adopt an aggressive pace of rate increases, perhaps three further rate increases rather than two in 2018.

The greenback also has benefited from anxiety in the euroze centered on Italian politics, as the country’s two largest populist parties on Thursday agreed to a coalition program that included plans to cut taxes and increase fiscal spending. Although their partnership doesn’t immediately appear to threaten the southern European country’s membership in the eurozone, it raises questions about longer-term fiscal health.

Credit-ratings firm DBRS warned on Thursday that the economic proposals from the 5 Star Movement and League could threaten Italy’s credit rating, according to Reuters, a factor that could elevate its borrowing costs.

Meanwhile, investors are focused on trade on two fronts. The U.S.-China trade are engaged in tense negotiations in Washington to resolve trade differences, with potentials for a trade conflict between the two largest economies in the world to ripple across the globe. Separately, negotiations around the North American Free Trade Agreement, or Nafta, appear to be stalled after Canada, Mexico and the U.S. let a soft deadline for an agreement on Thursday pass without striking a deal in principle. Canada’s Prime Minister Justin Trudeau said a sunset clause that the U.S. demands, which would put Nafta up for renegotiation every five years, was a sticking point.

What are strategists saying?

“After being fairly calm in the aftermath of the early March election, the combination of populist and nativist forces, coupled with what appears to be an expensive program for one of the most indebted countries, is spooking investors,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a Friday note.

“The euro, for example, has fallen each day this week. It recorded its low for the year on Wednesday near $1.1765. It has been unable to distance itself much from the low. It has straddled the $1.18 level, where there is a 1.9 bln euro option expiring today. With this week in tow, the euro has fallen in 10 of the past 13 weeks,” he said.

What else is in focus?

A reading for first-quarter advance services is due at 10 a.m. Eastern Time.

On the Fed speaker front, Cleveland Fed President Loretta Mester said the Fed should publish a financial stability report to highlight the central bank’s assessment of vulnerabilities in the financial system, speaking at a European Central Bank conference on macroprudential and monetary policy on Friday.

Meanwhile, Fed Gov. Lael Brainard is scheduled to speak at the Association for Neighborhood and Housing Development’s eighth annual conference at 9:15 a.m.

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