Euro’s pain makes for dollar’s weekly gain

The dollar was set to post a second week of chunky gains against the euro on Friday as traders wager on interest rates rising faster and further on the North Atlantics western shore, while sterling and the kiwi also firmed with rate hike bets.

The euro has been the weeks big mover, and although it has recovered to $1.1356 after slumping to $1.1263, it remains vulnerable as fundamentals and positioning swing to favour the dollar.

The single currency has lost 0.7% this week, helping the dollar index rise 0.5% and touch a 16-month high. It last sat just shy of that at 95.629.

“Previous post-GFC occasions when the euro traded below $1.10 were accompanied by a big euro short position,” said Societe Generale strategist Kit Juckes.

“If the question is ‘will the market now get very short euros’ then I think the answer is that it will unless data improve dramatically.”

This week, U.S. retail sales beat expectations on the heels of last weeks inflation surprise. In Europe, meanwhile, COVID-19 is surging, car sales slipped for a fourth consecutive month and central bankers are vowing to hold rates low.

Friday moves were slight and the focus will be on central bank speakers, with European Central Bank President Christine Lagarde at 0830 GMT, Bank of England economist Huw Pill at 1200 GMT and Federal Reserve officials Christopher Waller and Richard Clarida at 1545 GMT and 1715 GMT the highlights.

Another factor keeping moves small is the expectation U.S. President Joe Biden will announce his nominee to lead the Fed before Thanksgiving on Nov. 25, with frontrunners incumbent Jerome Powell and Governor Lael Brainard.

“If Powell is nominated, the market will buy dollar/yen,” said Brent Donnelly, trader and President at analytics firm Spectra Markets, since he is thought to take a slightly more hawkish approach to rate settings in the face of inflation.

“Euro/dollar shorts are big enough now that a Brainard win will hurt,” Donnelly said. “I would think you could see 100 pip euro/dollar rally on Brainard over one or two days.”

LIRA, BITCOIN BATTERED

In emerging markets, crisis in Turkey has driven the lira to a record low, while bitcoin is below $60,000 and eyeing its worst week in six months with cryptocurrency sentiment fragile.

Among other majors on Friday the yen was headed for a weekly loss of about 0.4%, though at 114.33 per dollar it has also recovered since touching an almost five-year low of 114.97 a few days ago.

The heavily-shorted and commodity-sensitive Australian dollar looks set for a third consecutive weekly loss and has been under pressure from a fall in oil prices over recent days. It was last steady at $0.7278. [AUD/]

Sterling has been the stellar performer besides the dollar among G10 currencies and has gained about 0.5% to $1.3487 as a surge in inflation to a 10-year high has firmed bets on the Bank of England hiking rates in a month.

The kiwi also leapt 0.7% on Thursday and is steady for the week as traders start to wager on the RBNZ turning extra hawkish and lifting rates by 50 basis points (bps) next week.

Swaps markets have priced a roughly 40% chance of a 50 bps hike.

“Rates markets remain skittish and the data pushed the bellwether two-year swap to a new high for the year, and that in turn, put the bid in behind the kiwi,” said analysts at ANZ Bank.

“With 36 bps (of hikes) priced in for next week and 198 bps priced in over the next eight meetings, local markets could be setting themselves up for some real disappointment if we ‘only’ get a 25 bps hike, as we expect.”

Bitcoin was headed for its worst week since May, dropping 13%. It was last near a three-week low at $57,033.

(Reporting by Tom Westbrook; Editing by Shri Navaratnam and Sam Holmes)