Currencies: Dollar index hovers near 2018 high as euro weakens, Treasury yields rise

A closely followed U.S. dollar index registered further gains on Thursday, hovering around its highest level of the year, as its main rival, the euro, remained downbeat on local geopolitical headwinds.

Don’t miss: Geopolitical flare-ups give haven currencies a renewed boost

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.13%  rose 0.2% to 93.540, holding around its highest levels of the year. The index has been on an almost relentless gallop higher since mid-April, even though it’s had a few stumbles recently.

A broader measure of the greenback, tracking 16 rival monetary units, the WSJ Dollar Index BUXX, +0.19% was up 0.2% to 87.06.

Check out: Why it may be downhill from here for the U.S. dollar

The euro EURUSD, -0.1355% slipped to $1.1788 versus $1.1807 late Wednesday when it hit its lowest point since mid-December.

The British pound GBPUSD, +0.0890% was a standout gainer earlier in the session but pared its wins and was last little changed in positive territory at $1.3488. Sterling strengthened against the euro EURGBP, -0.2285% leaving the shared currency to buy £0.8741.

Against the Japanese yen USDJPY, +0.35% the dollar was stronger, buying ¥110.74, from ¥110.39 late Wednesday.

Also read: Turkish lira hits historic low as Erdogan eyes control of country’s central bank

Currencies of U.S. trade partners in the North American Free Trade Agreement were weaker on Thursday, as market participants continue to wait for a deal-in-principle which is expected for this month. Versus the Canadian dollar USDCAD, +0.1955% the U.S. currency bought C$1.2816, up 0.2%. The buck rallied 0.8% against the Mexican peso USDMXN, +0.8113% fetching 19.7300 pesos for a dollar.

What is driving the market?

The U.S. dollar remained supported by higher Treasury yields, as well as weakness in the euro, which is its main rival and the largest component of the popular ICE dollar gauge.

U.S. Treasury yields trended higher on Thursday, with the 10-year note TMUBMUSD10Y, +0.27%  last yielding 3.096%. The 10-year note hit a near seven-year high on Wednesday.

Euro investors are keeping a close eye on Italian politics, after report surfaced Wednesday over a draft proposal from Italy’s two main populist parties, which are working to form a governing coalition, and could radically change the country’s relationship with the rest of Europe. While the parties backed away from some of the draft measures, the development took a bite out of Italian stocks and bonds on and weighed on the euro, thus giving the dollar room to edge higher

Read: Italian bonds show euro ‘exit’ fears still rumble below the surface

Meanwhile on the geopolitical front, investors kept a close eye on geopolitical issues. U.S. officials said they planned to go ahead with a summit set for June 12 with North Korea’s leader in Singapore, brushing aside comments by a senior North Korean official this week that cast doubt that the historic meeting will take place.

Pyongyang, in a lengthy statement on Wednesday, said it wasn’t interested in a meeting that would focus purely on denuclearization, as it also took issue with comparisons of its own nuclear-weapons state to that of Libya’s.

In the U.K., a report by the Daily Telegraph said Britain could be part of the European Union’s customs union beyond 2021 in an effort to avoid a hard border with Ireland. The report said Prime Minister Theresa May’s Brexit subcommittee had agreed on Britain staying in the union on a temporary basis, if the technology needed to keep the borders working after Brexit aren’t up and running.

Pursuit of a customs union would offer stability for U.K.-based businesses, which should be supportive for the pound. May had balked at the idea of a customs-union option because it would get in the way of the U.K. trying to negotiate an international trade deal.

What are strategists saying?

“The reception of today’s data has been muted, but the dollar had been running hot over the past weeks,” said Minh Trang, senior FX trader at Silicon Valley Bank, adding that rising Treasury yields spurred that move. “This goes back to the fact that both economic data and monetary policy are dollar-supportive at the moment, it just hadn’t been perceived like that before,” Trang said.

“With the [euro-dollar pair] back above $1.1800, we’re at a make or break point for judging near term trader sentiment. Over the next 48 hours will be telling, as the bulls and bears jostled for position but provided the euro-dollar can finish the week below $1.1850, that would suggest the bullish USD story remains intact. But a close below $1.1775 would be even more convincing,” said Stephen Innes, senior trader with OANDA, in a note to clients.

What else is in focus?

Jobless claims for the week ended May 12 climbed to 222,000, exceeding the forecast 215,000 but still remaining close to a 50-year low.

The Philly Fed manufacturing index for May stood at 34.4, compared with 23.2 before.

The Conference Board said its leading economic indicators index advanced 0.4% in April, while the March reading was revised up to also show a 0.4% rise.

Check out: MarketWatch’s Economic Calendar

Minneapolis Fed President Neel Kashkari will take part in a moderated discussion at 10:45 a.m. Eastern.

In other assets, U.S. stocks were mixed.

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