The dollar surged to a two-week high against the euro on Wednesday, as a push of oil prices above $40 a barrel and improved data out of China drew investors into riskier bets than low-yielding assets in Europe and Japan. The euro and yen have gained strongly against the dollar in recent weeks as investors sought traditional safe havens for their money on a darkening outlook for banks and economic growth, underlined again by downgraded IMF forecasts on Tuesday.
A move into stock markets has sent capital in the opposite direction over the past two days, helping the dollar recover. Expectations of a deal to stabilise oil output, and what seems like a bottoming out for now of expectations for US interest rate rises, have also helped the dollar. It rose 0.6 percent to 109.18 yen, up from lows of 107.61 hit on Monday and up 0.75 percent against the euro to $1.1304.
"Obviously when sentiment is better and (interest rate) carry trades are put in place you should see the euro and yen weaken," said Sanjiv Shah, Chief Investment Officer with London-based Sun Global Investments. "The yen may weaken from here. But whether that translates into dollar strength I don't know. We have just started the results season and it is looking like quite a bad quarter. The futures market does not believe that there will be more than one rise in US rates this year." The results of the first big US global bank to report, J.P. Morgan, showed profits falling. On the day, oil was down more than 1 percent and the boost for commodity-reliant currencies from Tuesday's jump faded in morning trade in Europe. The Norwegian crown and Australian and Canadian dollars fell by 0.2-0.3 percent.
Crude, however, remains well above $40 a barrel, which has allowed all three currencies to recover from long-term lows hit in January. "Oil prices have come up and that has led to tighter credit spreads and in the end stronger equity markets," Constantin Bolz, director for FX strategy with UBS Wealth Management in Zurich, said. "That also led to dollar-yen finding a bottom and in general to a slightly stronger dollar."
After the IMF's latest warning on the world economy and the potentially "severe" impact of a British vote to leave the European Union, eyes will be on G20 meetings in Washington for signs of how policymakers will proceed. The day's big policy set piece is the Bank of Canada's interest rate decision and updating of its economic forecasts, which come after a strong run higher for the Canadian dollar.
No change is expected in interest rates but the meeting will be watched closely for any attempt to talk the currency down. "Although the BoC may not have wanted CAD to appreciate 13 percent over the past three months, the BoC probably won't want to challenge most of the key tenets of the new optimism that has made CAD the second strongest G10 currency in 2016," analysts from Canadian bank BMO said in a note. The Canadian dollar stood at C$1.2794 per US dollar, not far from an overnight high of C$1.2750 - a level last seen in July.
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