October 26, 2018 / 2:06 PM / 24 days ago

FOREX-Dollar hits two-month high after U.S. GDP tops estimates

(Adds analyst quote, prices)

By Kate Duguid

NEW YORK, Oct 26 (Reuters) - The U.S. dollar index on Friday morning rose to a two-month high of 96.860 against a basket of currencies after U.S. headline third-quarter gross domestic product data topped estimates.

The U.S. economy slowed less than expected in the third quarter as the strongest consumer spending in nearly four years and a surge in inventory investment offset a tariff-related drop in soybean exports. GDP increased at a 3.5 percent annualized rate, the Commerce Department said on Friday in its first estimate.

U.S. President Donald Trump’s protectionist policies took 1.8 percent off of the GDP figure, Greg Anderson, global head of FX strategy at BMO Capital Markets said. The exchange of tariffs between the United States and China has lifted the value of the dollar, which serves as a safe-haven in times of volatility and geopolitical turmoil. The market has also assumed that while the U.S. economy will be hit by reduced trade, it will be hurt less than its trading partners, which also boosts the dollar.

Yet while the strong currency boosts U.S. assets, it also raises the cost of imports and exports, which hurts growth. The net effect tends to be neutral. “Unless you are willing and able to push down your currency at the same time that you’re erecting your tariffs, the currency move is going to offset the tariffs,” Anderson said.

The GDP report also showed the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, missed expectations after it increased at 1.6 percent rate in the third quarter. The core PCE price index rose at a 2.1 percent pace in the April-June period.

Soft inflation also helped strengthen the dollar. And despite the strong headline growth, it may give the Federal Reserve a reason to hold off on raising rates for a fourth time this year at its policy-making meeting in December.

“The relief for the market is soft inflation. If the Fed is willing to use it, it gives them reason to pause in December if need be,” Anderson said.

Reporting by Kate Duguid Editing by Susan Thomas

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