Dollar dips but longer-term rally still seen in play

The dollar lost some steam on Thursday, slipping from its 14-year-high against a basket of currencies as investors took profits before a batch of U.S. economic data due later in the day is published.

The dollar index .DXY, which measures the greenback against six major rivals, dipped 0.1 percent to 102.96. It has receded from the 103.65 marked on Tuesday, its highest since December 2002. Still, the dollar’s decline was limited as the Federal Reserve signalled more frequent rate hikes in 2017, partly on expectations for faster economic growth under the incoming Trump Administration.

While trade is expected to slow down ahead of Christmas, the market’s near-term focus is on U.S. economic indicators due Thursday, including revised GDP for July-Sept, durable goods orders for November, and weekly initial jobless claims.

“The market is relatively quiet on a holiday mood, but if the U.S. economic data is worse than the market expects, the dollar is likely to be sold further,” said Kumiko Ishikawa, FX market analyst at Sony Financial Holdings.

The dollar index has gained more than five percent since the Nov. 8 U.S. election, as traders have bet that Trump will step up fiscal spending and stoke higher inflation. The euro was up 0.2 percent at $ 1.0437, rebounding from $ 1.0352 on Tuesday, the lowest since January 2003.

However, the common currency could come under pressure as investors contemplate the future of the ailing Monte dei Paschi di Siena bank BMPS., Italy’s third largest lender. The world’s oldest bank has all but failed to pull off a last-ditch private sector rescue plan, making a state rescue appear to be inevitable, sources said on Wednesday.

“The impact on forex market is limited for now, mainly because many people are away on holidays.” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank. “But European bank stocks are down, and EU bonds could also be hit later in the day on worries for the future of Monte dei Paschi,” she added.

Prime Minister Paolo Gentiloni’s new government is likely to meet this week to issue an emergency decree to inject capital into the bank, which the European Central Bank has judged to be the weakest of the euro zone’s major banks. But such state aid could prove to be politically explosive, given that investors are required to bear losses under EU bailout rules. It could also undermine confidence in Italy’s wider banking sector, which is saddled with a third of the euro zone’s total bad loans.

The yen showed little movement ahead of a national holiday on Friday. The greenback stood at 117.62 yen versus the yen, retreating from 10-1/2 month high of 118.66 yen set last week. The Australian and New Zealand dollars held near seven-month lows against its their U.S. counterpart, weighed down by a strengthening greenback and anticipation of faster Fed rate hikes next year. The Australian dollar edged up 0.1 percent at $ 0.7246, after dipping to $ 0.7223, lowest since early June. New Zealand’s kiwi last stood at $ 0.6909, close to a seven-month low of $ 0.6883 hit on Tuesday.