The dollar held at a near three-week high on Tuesday as investors sought the relative safety of the U.S. currency after the International Monetary Fund cut its forecasts for the world economy in 2019 and 2020.
The dollar has been considered a consensus short trade since the end of 2018 on concerns that the U.S. Federal Reserve will pause in its interest rate increases.
But it has been boosted in recent days by lack of growth in other regions, notably Europe.
“We still think the dollar’s gains may be overdone and the European Central Bank might offer some guidance later this week on when it will start to tighten monetary policy,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.
Market watchers say the dollar may also come under pressure as the U.S. government shutdown begins to weigh on domestic growth.
Morgan Stanley strategists believe that U.S. growth in the first quarter is likely to fall below their forecast of an annual 2.2 per cent, about half the 4.2 per cent growth in 2018.
The IMF cut its growth forecasts for 2019 and 2020 because of weakness in Europe and some emerging markets.
It also said failure to resolve trade tensions could further destabilise the global economy.
On Monday, the dollar .DXY rose to 96.472, its highest level since Jan. 4 and up more than 1.5 per cent from a three-month low earlier this month.
The euro struggled near a three-week low of $1.1361, down nearly two per cent over the past two weeks from near $1.16 levels.
The dollar strengthened 0.3 per cent versus the offshore yuan to 6.8157. It has gained around one per cent over the offshore yuan in the past seven sessions.
The yen, another safe-haven currency, was steady against the dollar, fetching 109.64 in early trade.
The Bank of Japan is expected to leave policy unchanged at its Jan. 22-23 meeting. Analysts expect monetary policy to remain accommodative in Japan this year.
“The slowing global economy and depressed oil prices are expected to force the BoJ to revise down its outlook for economic growth and inflation,” said Osamu Takashima, currency strategist at Citibank in a note. (Reuters/NAN)