The dollar is holding on to most of its recent gains in early trading in Europe Friday, supported by fears of an extended period of uncertainty over Brexit that is weighing on both sterling and the euro.
Downbeat comments from President Donald Trump's chief economic adviser Larry Kudlow late Thursday also encouraged some risk aversion. Kudlow told reporters that a trade deal with China could still be months away, even as Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer arrive in Beijing for a new round of talks.
The U.K. House of Commons is set to vote once more on Prime Minister Theresa May’s twice-defeated Withdrawal Agreement later Friday, but the initiative seems doomed to failure, lacking the support of the Northern Irish party that May’s Conservatives rely on, and of hard-line Conservative Brexiteers themselves.
The most likely outcome of the bill failing is that May will ask the EU for a longer extension to the Brexit deadline of April 12th, accepting that this will mean taking part in EU parliamentary elections in May. It is not clear that there is the necessary unanimous support among EU governments for an extension, so a ‘Hard Brexit’ on April 12th remains the default scenario.
The pound hit a three-week low against the dollar Thursday as the market digested the implications of a stalemate that couldn’t be broken by votes on eight alternative courses of action to the Withdrawal Agreement.
Despite rebounding a little overnight, at 0400 AM ET (0800 GMT), it was down some 0.2% from Thursday's close at $1.3019 against the dollar. Against the euro, it hit a one-week low of 1.1597 after German retail sales data for February turned out stronger than expected, providing some rare comfort about the strength of Europe's largest economy.
The dollar index, which measures the greenback against a basket of six major currencies, was at a two-week high of 96.822, thanks to safe haven flows at the expense of emerging market currencies such as the Turkish lira and South African rand. The dollar surged by over 4% against the lira on Thursday and is up another 1.7% Friday morning.