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Trade tensions, dollar danger cloud economic optimism in Davos

By Noah Barkin

DAVOS, Switzerland (Reuters) – A trade war between the United States and China and a strengthening dollar are among the biggest threats to a brightening global economic outlook, according to leading economists at the World Economic Forum in Davos.

As political leaders, businessmen and bankers converge on the resort in the Swiss Alps this week, they can draw hope from a more benign economic picture and a rally in global stock markets on expectations of major stimulus under a new U.S. administration led by Donald Trump.

The backdrop is brighter than it was a year ago, when concerns about a rapid economic slowdown in China led to what Credit Suisse CEO Tidjane Thiam described at the time as “the worst start to any year on record in financial markets ever”.

“I am more optimistic than last year. If no major political or geopolitical uncertainties materialize and derail the world economy, it might even surprise to the upside in 2017,” Axel Weber, the chairman of Swiss bank UBS <UBSG.S> and a former president of the German Bundesbank, told Reuters.

Still, there are big storm clouds on the horizon.

“It is too early to give the all clear,” Weber continued. “This cyclical upswing hides but does not solve the world’s underlying structural problems, which are excessive debt, over-reliance on monetary policy, and adverse demographic developments.”

Among the biggest concerns for 2017 cited by the half dozen economists interviewed by Reuters was the threat of a U.S.-China trade war, and broader economic tensions, triggered by what they fear could be a more confrontational Trump administration.

Trump is threatening to brand China a currency manipulator and impose heavy tariffs on imports of Chinese goods. Last month he named leading China critic Peter Navarro, author of the book “Death by China”, as a top trade adviser.

“This is the key uncertainty because you don’t know how much the rhetoric is a ploy to get better deals,” said Raghuram Rajan, an economist at the University of Chicago who stepped down as governor of India’s central bank last September.

“I’m worried about the people he is surrounding himself with. If they have a more protectionist world view and believe the reason the U.S. is not doing well is because others are cheating that creates a certain kind of rhetoric that could end up very badly for the world.”

CURRENCY RISKS

Last month, the U.S. Federal Reserve hiked interest rates for just the second time in a decade, a sign that the lengthy period of ultra-loose monetary policy that followed the global financial crisis may be coming to an end.

The World Bank said last week that it expects global growth to accelerate to 2.7 percent this year, up from a post-crisis low of 2.3 percent in 2016, on the back of a pickup in U.S. growth and a recovery in emerging markets fueled by a rise in commodity prices.

A year ago in Davos, both Rajan and Weber warned about the limits of loose monetary policy. But now that the Fed is in tightening mode, a new set of risks has emerged.

One is a further strengthening of the dollar, which is already hovering near 14-year highs against the euro.

A further appreciation could widen the U.S. trade deficit, increasing pressure on Trump to resort to protectionist policies. It could also expose weaknesses in the balance sheets of borrowers outside the United States who have borrowed in dollars but hold domestic currency assets.

In Europe, by contrast, a stronger dollar could add fuel to a solid if unspectacular economic recovery, allowing the European Central Bank to plot an end to its own easy money policies including the bond-buying, or quantitative easing (QE), program it recently extended through to the end of 2017.

While welcome, this would also come with risks, particularly for the peripheral euro zone countries that have come to depend on QE to keep a lid on their borrowing costs.

“Just when you think the euro zone is stable it might turn out not to be,” said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund (IMF).

“If U.S. interest rates continue to rise and the dollar appreciates against the euro it’s going to start getting very hard for (ECB President) Mario Draghi to tell the story that he’s doing QE to prop up inflation. If he ever slows down on QE, the vulnerabilities of the periphery countries are huge.”

EUROPEAN BANKS

Rajan and Richard Baldwin of the Graduate Institute in Geneva said they viewed European banks as another big risk for the global outlook. Italy agreed last month to inject about 6.6 billion euros into Monte dei Paschi di Siena <BMPS.MI>, but the weakness of other Italian banks and German institutions, including Deutsche Bank <DBKGn.DE>, remain a concern.

However the biggest threat may be political. Were French far-right leader Marine Le Pen, who favors a Brexit-style referendum on France’s EU membership, to deliver a Trump-like surprise in the two-round French election in April and May, doubts about the future of the EU and euro zone will increase.

The chances of that seem slim for now. A poll last week suggested conservative candidate Francois Fillon would beat Le Pen in a runoff by a 63 to 37 percent margin. But after two seismic political shocks in 2016 – Trump and Brexit – no one is counting her out.

“Political surprises may fundamentally alter the currently favorable economic and financial outlook for 2017,” said Weber.

(Reporting by Noah Barkin; Editing by Pravin Char)

Global stocks and dollar firmer as Trump news conference approaches

By Vikram Subhedar

LONDON (Reuters) – World stocks and the dollar rose before a news conference by U.S. President-elect Donald Trump in which he is expected to give more details about his plans for the U.S. economy.

Trump’s campaign calls for tax cuts and more infrastructure spending have boosted U.S. shares and the dollar, but his protectionist statements and a flurry of off-the-cuff Tweets have kept many investors from adding to risky positions.

The UK’s FTSE 100 was poised for a record twelfth straight day of gains while European shares rose 0.2 percent.

Stock futures on Wall Street were 0.1 percent firmer though the post-U.S. election rally is showing signs of running out of steam.

Trump has vowed to label China a currency manipulator on his first day in office on Jan. 20 and has threatened to slap huge tariffs on imports from China.

U.S. House of Representatives Speaker Paul Ryan and top members of Trump’s transition team are discussing a controversial plan to tax imports.

Economists have warned that protectionist measures could stifle international trade and hurt global growth.

That brings Trump’s press conference, scheduled for 11:00 EST, into sharp focus.

“From a currency perspective, markets will aim to get a clearer picture on trade, fiscal stimulus and the new administration’s relationship to the Fed,” Morgan Stanley strategists wrote in a note to clients.

The dollar inched higher against the yen on Wednesday but was 0.4 percent firmer against the basket of currencies used to measure its broader strength.

The dollar has gained broadly since Trump’s election in November as investors bet he would boost public spending and spur repatriation of overseas funds by U.S. companies as well as higher inflation and interest rates.

But more doubts have emerged in recent weeks about that narrative, and investors will have a close eye on what the new president says about trade and relations with China.

Bank of America-Merrill Lynch strategists warned on Wednesday that a worrying consensus has developed in financial markets with analysts and investors overwhelmingly bearish on bonds and positive on developed market stocks, financials and the U.S. dollar.

Sterling meanwhile edged towards a 10-week low against the dollar on Wednesday, kept under pressure by fears that Britain will undergo a “hard” exit from the EU in which access to the single market will play second fiddle to immigration controls.

The Turkish lira fell to new lows despite efforts by the country’s central bank to support it with pressures piling on the economy.

An auction of German debt was expected to go down well with investors looking for safe havens. Portuguese yields held near 11-month highs as the country prepared for its toughest bond sale in years.

In commodity markets, oil rose, lifted by reports of Saudi supply cuts to Asia, but gains were capped by a lack of detail about the reductions and because of signs of rising supplies from other producers.

Prices for Brent futures LCOc1, the international benchmark for oil prices, were trading at $53.94 per barrel at 1200 GMT, up 30 cents from their previous close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $51.11 a barrel, up 29 cents.

(Editing by Hugh Lawson and Toby Chopra)

Dollar falls against yen on risk reduction; sterling sinks

By Sam Forgione

NEW YORK (Reuters) – The U.S. dollar slumped against the safe-haven yen on Monday on investors’ reduced appetite for risk, while sterling sank to more than two-month lows on talk that Britain would drastically rework trade ties with the European Union after Brexit.

A fall in U.S. Treasury yields and U.S. stocks drove the dollar down as much as 0.6 percent against the yen to a session low of 116.16 yen JPY=. The dollar remained within recent trading ranges and did not test Friday’s more than three-week low of 115.04 yen.

Analysts said there was no fundamental catalyst for the dollar’s decline against the yen, with traders probably reacting to lower U.S. yields and equities.

“There’s an optical relationship with the fact that stocks are lower,” said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.

The dollar was last down 0.4 percent at 116.43 yen. It dipped modestly against the euro and Swiss franc, leading the dollar index .DXY, which measures the greenback against a basket of six major currencies, to stand 0.08 percent lower at 102.150.

The pound slid more than 1 percent against both the dollar GBP=D4 and the euro EURGBP=R after weekend comments from British Prime Minister Theresa May that she was not interested in keeping “bits of membership” of the European Union.

Sterling slid as low as $1.2125, its weakest against the dollar since the end of October. It fell about 1.2 percent against the euro, hitting 86.91 pence per euro, the lowest since mid-November.

“Anything that suggests a hard Brexit is more likely … is very damaging to UK growth prospects,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York.

Against the dollar, sterling was last down 1 percent at $1.2156, while the euro EUR= was up 0.3 percent at 1.0562. The dollar was down 0.17 percent against the franc at 1.0162 francs CHF=.

On Wall Street, the benchmark S&P 500 stock index .SPX was down 0.13 percent, while benchmark 10-year U.S. Treasury yields US10YT=RR fell nearly four basis points on the day to 2.383 percent.

(Reporting by Sam Forgione; Additional reporting by Marc Jones in London; Editing by Lisa Von Ahn))

Dollar index holds near 14-year high

By Richard Leong

NEW YORK (Reuters) – The dollar was little changed on Monday versus a basket of currencies, holding near a 14-year peak buttressed by expectations of fiscal stimulus from U.S. President-elect Donald Trump and a faster pace of interest rate increases.

The greenback scaled back from its highest since early February against the yen as data that showed Japan’s export performance improved strongly in November spurred a burst of profit-taking.

The dollar, which has rallied since Trump’s win on Nov. 8, will likely trade in a tight range in coming days on dwindling liquidity, analysts said.

Profit-taking and lower U.S. Treasury yields <US2YT=RR> <US10YT=RR> would keep the greenback from rising further, they said.

“The dollar would be reasonably sideways between now and the end of the year,” said Jason Leinwand, founder and chief executive officer of FirstLine FX in Randolph, New Jersey.

The dollar index <.DXY> which measures the greenback versus the euro, yen and four other currencies, was up 0.03 percent at 102.98. On Dec. 15, it reached 103.56 which was its highest since Dec 2002.

Traders await a speech from Fed Chair Janet Yellen at 1:30 p.m. (1830 GMT) for possible hints that last week’s Fed meeting, where policy-makers signaled the central bank could increase interest rates three times in 2017, was interpreted by markets as more hawkish than had been intended. [FED/DIARY]

U.S. interest rates futures implied traders saw about a 46 percent chance the Fed would hike at least three times in 2017 with the next increase likely in June, according to CME Group’s FedWatch program. <FFM7> <FFZ7>

Prospects of more rate hikes supported bullish bets on the dollar. Data released on Friday showed dollar net long positions were little changed on Dec. 13. Net shorts on the yen rose to their largest since early December last year. [IMM/FX]

The Bank of Japan started a two-day policy meeting on Monday, at which it is expected to keep its 10-year government bond yield target <JP10YT=RR> as the weaker yen helps Japan’s economic prospects, a Reuters poll showed on Friday.

“The speed of the yen’s weakening was likely much faster than the BOJ anticipated,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.

The dollar was down almost 0.9 percent at 117.13 yen <JPY=> after climbing to 118.66 yen on Dec. 15 which was the highest since Feb. 2, according to Reuters data showed.

(In Dec 19 item, corrects spelling of last name to Leinwand, not Weinwand, in 5th paragraph)

(Additional reporting by Jemima Kelly in London and Tokyo markets team; Editing by Chizu Nomiyama)

Dollar steadies as pre-Fed nerves dominate

Bank notes of Euro, Hong Kong dollar, U.S. dollar, Japanese yen, GB pound and Chinese yuan are seen in this picture

y Patrick Graham

LONDON (Reuters) – The dollar steadied against the yen and euro on Tuesday after its weakest day in a week, with markets still uneasy that a Federal Reserve meeting ending on Wednesday may provoke more investors to cash in the greenback’s recent gains.

Barclays was the latest major bank to cast some doubt on a dollar rally extending into a first quarter set to be dominated by the first policy initiatives from the Trump administration.

While investors have bet on the new president taking steps to bolster growth that will push inflation higher, there are also concerns that he may spark protectionism globally, driving cash into traditional safe havens like the yen.

A rise in Fed interest rates on Wednesday, a big reason for the dollar index’s 7 percent rise since September, looks fully priced in and there are also doubts over whether the U.S. central bank will want to send a strong signal that more tightening is to follow.

“We think the meeting may be a catalyst for people to take some profit on long dollar positions,” Barclays analyst Hamish Pepper said.

“The dollar tends not to perform particularly well in December. If you put that together with a well priced Fed meeting plus already long positioning, it is the right set-up for a pullback.”

The yen strengthened to less than 115 yen per dollar in Asian trade before settling at 115.34, down 0.2 percent on the day but almost a full yen stronger than 24 hours previously.

It has borne the brunt of the dollar’s rally in the past month, down 13 percent since early October. But some traders and analysts have begun to wonder if the Japanese currency might benefit next year if global political risks grow.

Barclays forecasts the dollar weakening to 100 yen in a year’s time.

The euro was little changed at $1.0629 having gained 0.7 percent on Monday as German bund yields rose amid signs Italy will bail out Italian bank Monte dei Paschi di Siena if need be.

Sterling inched higher helped by higher than expected inflation for November and comments from finance minister Philip Hammond backing a transition period to smooth the process of leaving the European Union.

“Rates markets are discounting close to five 25 basis point Fed rate hikes by the end of 2018,” analysts from BNP Paribas said in a note to clients.

“With the Fed likely to be cautious in its forward-looking language on Wednesday, those positioned long dollars heading into the meeting may be concluding that risk-reward is not attractive for staying in positions into the event risk.”

(Editing by Robin Pomeroy)

Drop in U.S. consumer spending clouds Fed rate hike outlook

By Jason Lange

WASHINGTON (Reuters) – U.S. consumer spending fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could keep the Federal Reserve cautious about raising interest rates.

The Commerce Department said on Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.1 percent last month after accounting for inflation.

Analysts polled by Reuters had expected a 0.1 percent gain.

“Consumers took a breather in August,” said Chris Christopher of IHS Global Insight.

Fed Chair Janet Yellen said last week she expected the U.S. central bank would raise rates once later this year to keep the economy from eventually overheating.

Prices for fed funds futures suggest investors see almost no chance of a hike at the Fed’s next policy meeting in early November and roughly even odds of an increase at its mid-December meeting, according to CME Group.

The dollar <.DXY> was little changed against a basket of currencies while U.S. stock prices were trading higher.

Consumer spending, which has been robust in recent months, partially offset the drag from weak business investment and falling inventories in the second quarter when the economy expanded at a lackluster 1.4 percent annual rate.

Economists said overall economic growth could still accelerate in the current quarter even with August’s slight decline in consumer spending.

The Atlanta Fed said growth appeared on track to accelerate to a 2.4 percent annual rate in the third quarter, according to its closely watched GDPNow forecasting model. It had forecast growth of 2.8 percent for the period earlier this week.

A tightening labor market appears to be pushing up wages and could fuel higher levels of spending in the future. Personal income rose 0.2 percent in August, in line with expectations.

Consumer prices also rose about as much expected in August, with the price index excluding food and energy increasing 0.2 percent from the prior month. That left inflation excluding food and energy at 1.7 percent in the 12 months through August, up a tenth of a percentage point from the prior month and closer to the Fed’s 2 percent inflation target.

(Reporting by Jason Lange; Editing by Paul Simao)

Dollar falls after weak U.S. economic data cuts Fed rate hike bets

By Dion Rabouin

NEW YORK (Reuters) – The dollar tumbled on Tuesday after economic data showed the U.S. service sector grew at its slowest pace since early 2010, which dimmed expectations for a near-term interest rate increase from the Federal Reserve.

The dollar fell to a one-week low against the Japanese yen after the data, and the British pound rose to its highest level against the dollar since mid-July.

The Institute for Supply Management’s non-manufacturing purchasing managers’ index fell to 51.4 last month, far short of economists’ expectations and the largest one-month drop since November 2008.

“When you pair that with data we got Friday, which was non-farm payrolls, disappointing some, what it does is it starts to kick back interest rate expectations past the September meeting and even lowering them in December too,” said John Doyle, director of markets at Tempus Inc in Washington.

“You’re seeing slightly softer data over the last couple of trading sessions equals less likelihood the Fed will raise rates at the meeting this month and with that comes a slightly weaker dollar.”

The service sector makes up more than two-thirds of the U.S. economy.

Friday’s U.S. non-farm payrolls report showed employers in the United States added 151,000 jobs last month, missing economists’ expectations and falling well below readings in June and July, which both showed more than 250,000 jobs added in each month.

On Tuesday, the dollar fell more than 1 percent against the yen, slipping to 102.05 yen per dollar.

The British pound rose by 1 percent against the dollar, touching a fresh seven-week high at $1.3443. The euro rose to $1.1255, its highest since Aug. 26 after the data.

The dollar index dropped 1 percent to 94.821, its lowest since Aug. 26.

The New Zealand dollar was the biggest gainer among major currencies, rising 1.4 percent against its U.S. counterpart to its highest level since May 2015. The kiwi was boosted by the weak U.S. data and a rise in milk prices after a strong dairy auction in New Zealand.

The Australian dollar jumped 1.3 percent against the greenback after the data. The Aussie was also bolstered by the Reserve Bank of Australia’s decision to leave interest rates unchanged at 1.5 percent and minimal commentary from the central bank on the currency’s 10 percent rise against the U.S. dollar since January.

(Reporting by Dion Rabouin; Editing by David Gregorio)

Dollar drops as Fed rate rise prospects reassessed

A bank employee counts U.S. dollar notes at a Kasikornbank in Bangkok, Thailand

By Anirban Nag

LONDON (Reuters) – The dollar fell against a basket of currencies on Wednesday as investors re-evaluated whether the Federal Reserve will raise interest rates this year, which also sent the higher-yielding Australian dollar to its loftiest level since late April.

The U.S. dollar sagged against the euro and the yen after downbeat productivity data sapped some of the momentum it had gained from last week’s robust jobs report.

U.S. Treasury yields fell after the productivity report suggested the economy may not be growing as quickly as anticipated, prompting investors to cut long-term inflation expectations. According to CME’s Fedwatch, investors have trimmed chances of a rate rise in December 2016.

The dollar was down 0.6 percent at 101.28 yen, having gone as high as 102.66 on Monday on the strong non-farm payrolls data. The euro rose 0.5 percent to $1.1173, touching a 5-day high of $1.1184.

The dollar index dropped 0.6 percent to 95.577.

“The release of the third consecutive decline in quarterly U.S. productivity – the worst run since at least 1980 – does not bode well for the prospects for the dollar,” Morgan Stanley head of currency strategy, Hans Redeker, said.

The Australian dollar advanced to a more than three-month peak of $0.7729, buoyed this week by Australia’s relatively high yields and stronger investor appetite for risk.

“Part of the Australian dollar’s resilience is the lack of follow-through in pricing for a Fed hike in September, limiting the U.S. dollar’s gains,” analysts at Westpac said in a note. They recommended investors to buy the Australian dollar.

The U.S. dollar’s weakness also gave struggling sterling a lift. The pound was up 0.5 percent at $1.3061, recovering from $1.2956 struck on Tuesday, its lowest since July 11.

The pound took a knock on Tuesday after Bank of England policymaker Ian McCafferty said more monetary easing was likely to be needed if the UK’s economic decline worsened.

In European trade, attention briefly turned to the Norwegian crown. The crown scaled its highest against the euro in more than a month, after inflation rose more than expected in July, sapping expectations of interest rate cuts in the near term from the Norges Bank.

Data showed July core inflation rose to 3.7 percent from a year ago, beating expectations of a 3.1 percent rise. For the month, core inflation rose 0.7 percent.

The euro fell 0.8 percent to 9.2575 crowns, its lowest since July 5, and down from around 9.33 beforehand.

Earlier, Nordea Markets said the Norwegian policy rate had bottomed out at 0.50 percent and the central bank was no longer expected to cut rates in September.

(Editing by Toby Chopra)

Dollar down vs. sterling, euro on bets Britain votes ‘Remain’

By Dion Rabouin

NEW YORK (Reuters) – Sterling hit its highest level of the year against the dollar on Thursday after opinion polls in recent days favored Britain staying in the European Union and bookmakers’ odds indicated a further shift toward the “Remain” camp.

The British pound and the euro were off their highs in late trading, but held onto gains against the greenback and Japanese yen as voters in the United Kingdom took to the polls to decide whether they would exit the EU.

An Ipsos MORI poll for the Evening Standard carried out on Tuesday and Wednesday, as well as an online Populus poll, showed over 50 percent support for staying in the EU.

Earlier polls by ComRes and by YouGov also showed a last-minute rise in support for remaining.

In addition to the murder of pro-EU British lawmaker Jo Cox last week, the increasing likelihood of a “Remain” vote was largely the result of campaigns by British and international politicians, including U.S. President Barack Obama, who lobbied Britons to stay, said Juan Perez, currency strategist at Tempus Inc in Washington.

“Even though 9-10 percent of those surveyed are undecided and that’s where things are hanging in the balance, it seems like there is a majority for remain,” Perez said.

Sterling <GBP=> rose to $1.4946, its highest against the dollar since Dec. 31, in early trading. The pound was last up 1.05 percent at $1.4852.

The euro <EUR=> touched a six-week high of $1.1421 against the dollar, also on the back of increased odds that Britain will remain in the 28-member European bloc. The currency was last up 0.5 percent at $1.1349.

Both the euro and pound also rose against the safe-haven yen, which took a beating as traders favored riskier assets. The euro <EURJPY=> was last up 1.8 percent against the Japanese currency, moving to 120.01 yen. Sterling <GBPJPY=> added 2.2 percent to 156.91 yen.

Analysts said the big moves in sterling and the euro were the result of bets from large institutions that had hired top polling firms to measure sentiment ahead of Thursday’s referendum.

The dollar hit its highest level against the yen <JPY=> in more than a week on Thursday. It was last up 1.4 percent at 105.80 yen.

Voting in the British referendum will end at 5:00 p.m. EST, with results expected early on Friday.

(Reporting by Dion Rabouin; Editing by Lisa Von Ahn and Andrew Hay)

U.S. posts $108 billion dollar deficit in March

U.S. Treasury Secretary Jack Lew holds a two dollar note as he speaks during an event about currency redesign hosted by the University of Maryland in College Park, Maryland

WASHINGTON (Reuters) – The U.S. government posted a $108 billion budget deficit in March, more than double the amount from the same period last year, the Treasury Department said on Tuesday.

The government had a deficit of $53 billion in March of 2015, according to the Treasury’s monthly budget statement. Analysts polled by Reuters had expected a $104 billion deficit for last month.

Accounting for calendar adjustments, March would have shown a $102 billion deficit compared with an adjusted $89 billion deficit in March 2015.

The current fiscal year-to-date deficit was $461 billion, up 5 percent from a $439 billion deficit this time last year.

Receipts last month totaled $228 billion, while outlays stood at $336 billion.

(Reporting by Megan Cassella; Editing by Andrea Ricci)

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