LONDON (Reuters) - The dollar rose on Wednesday to its highest levels in over a year as a crisis in the Turkish lira that has spread to emerging markets fed demand for the greenback as a safe-haven asset.
Signs the U.S. economy remains robust ahead of an expected interest rate hike by the Federal Reserve next month have seen the dollar dominate other currencies in recent weeks.
A plunge in the lira which has hurt the euro on concerns about European banks' exposure to Turkey has driven further demand for the dollar along with other safe-haven currencies such as the Swiss franc and the Japanese yen.
Against a basket of major currencies on Wednesday, the dollar rose to 96.862, its highest level since late June 2017. (DXY)
"In light of all the turmoil we've seen out of Turkey and the subsequent contagion into other emerging markets, the dollar is pretty much establishing itself as the safe-haven currency," said Bart Wakabayashi, Tokyo branch manager at State Street Bank.
"If you are going to park your money somewhere to stay away from the turmoil, the dollar is going to be the currency of choice," he said.
On Wednesday, however, the lira recovered some ground to trade briefly at 5.7503 to the U.S. dollar, firming from a close of 6.3577 a day earlier.
The rebound to below 6.0 against the dollar was driven by a banking watchdog step to limit swap transactions and by hopes of improved EU relations.
Turkey's finance minister will also seek to reassure international investors in a conference call on Thursday.
Markets are concerned by President Tayyip Erdogan's influence over the economy and his resistance to interest rate increases to tackle double-digit inflation.
The rally in the dollar prompted selling in both the euro and the British pound.
The single currency drifted down toward $1.13 for the first time since July 2017 (EUR=EBS) and sterling dipped below $1.27 for the first time since June last year.
The euro is under pressure because of the impact of the Turkish lira collapse on euro zone banks with exposure to Turkey and due to concerns about a fiscal spending spree by the Italian government which is involved in a standoff with Brussels.
"The attractive rate advantage of U.S. bonds is strengthening demand for the dollar. Combined with doubts over the [monetary] normalization efforts of the European Central Bank this limits the upside potential in EUR-USD for now," said Commerzbank (DE:CBKG) FX analyst Esther Maria Reichelt.
Investors are worried that the market turbulence caused by Turkey's economic meltdown might delay the ECB’s normalization timetable, she said.
Investors remain nervous about the plunge in the lira, prompting capital outflows from other emerging markets that run hefty current account deficits and rely on foreign capital.
Against the yen
"With the Bank of England unlikely to raise rates for some time (the market prices the next hike for 12 months' time), U.K. economic data will be a second-order consideration for the pound compared to Brexit negotiations for now," Nick Smyth, an interest rate strategist at BNZ Markets in Wellington, said in a note.
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