Dollar climbs to 16-month peak; pound falls on Brexit fears

NEW YORK (Reuters): The dollar reached a 16-month high on Monday against a basket of currencies as investors built bets on a Federal Reserve interest rate increase next month, and political risks in Europe which put pressure on the euro and the pound. 

Fears about a no-deal Brexit and a growing rift in Europe over Italy’s budget have also boosted the dollar. 

The greenback has rebounded from losses tied to the view that US elections last Tuesday, which produced a split control of Congress, would reduce chances of more fiscal stimulus measures. 

The dollar’s bounce has been underpinned by the Fed’s signal that it would hike key lending rates further as US economic expansion remains on track. 

“Rising global uncertainty and a widening US yield differential with other economies provide support, but an elevated valuation may constrain further gains,” BlackRock Global Chief Investment Strategist Richard Turnill wrote in a research note on Monday. 

The futures market implied traders saw about a 76% chance the US central bank would raise rates for a fourth time in 2018 at its 18-19 December policy meeting, according to CME Group’s FedWatch program. 

Net long positions on the dollar versus G10 currencies last week rose to their highest levels since 2015 at $ 30.4 billion, according to CFTC data. 

An index that tracks the dollar against the euro, yen, sterling and three other currencies was up 0.44% at 97.331. It reached 97.578 earlier Monday, which was the highest since June 2017. 

US trading was muted by the US Veterans Day holiday. While Wall Street and currency markets were open for business, the US bond market was closed. 

The sterling shed over 1% at one point as doubts grew over Prime Minister Theresa May’s ability to get the backing of the EU and her own party for any Brexit deal. 

With less than five months before Britain is due to leave the EU on 29 March, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and EU member Ireland.

The pound was down 0.66% at $ 1.2893 and the euro was marginally lower against the pound at 87.36 pence.

The euro was knocked back by concerns about Rome’s tension with the European Commission over its 2019 budget and weakness in Italy’s banking sector.

The single currency fell 0.63% versus the dollar to its lowest since June 2017 at $ 1.124.