MADRID – The United States dollar jumped to around its highest level in a year-and-a-half on Monday, propelled by expectations for higher US interest rates and an uncertain political landscape in Europe.
The WSJ Dollar Index was up 0.4 percent in early morning trading, hovering around levels last seen in June 2017.
Monday’s biggest gains came against the British pound and the euro in a critical week for both Brexit negotiations and the Italian budget. The dollar was also stronger against the Chinese yuan amid ongoing tensions over US and China trade and security issues.
The British pound was down 1 percent against the dollar at $1.2850 early Monday following reports that the United Kingdom government’s preparations to leave the European Union are close to faltering. On Friday, UK transport minister Jo Johnson resigned over the lack of progress in Brexit talks, calling for the public to have another say.
The euro meanwhile was down 0.9 percent at $1.1249, also around its lowest since June 2017.
Pressure on the common currency came ahead of Tuesday’s deadline for Italy to resubmit its 2019 budget plans to the European Commission. Many investors remain concerned that the deadline is likely to pass without substantial changes to the budget, deepening tensions between Italy and Brussels.
The European Union rejected Italy’s draft budget in October as incompatible with the bloc’s rules on fiscal discipline.
“The combination of strong cyclical momentum in the US and the Fed’s gradual rate increases combined with negative developments overseas continues to encourage an even stronger US dollar,” currency strategists at MUFG wrote in a note.
Last week, the dollar got a lift after a gauge of US business prices surged in October, with producer prices increasing the most since late 2012. That helped support expectations for the Federal Reserve to continue raising interest rates, after the US central bank last week offered a mostly upbeat assessment of the economy.
Fed-funds futures tracked by CME Group suggest investors currently price a roughly 76 percent chance of a rate increase in December, compared with 72 percent a week ago.
Expectations of rising borrowing costs make the US currency more appealing to yield-seeking investors.
US economic data later this week is expected to provide further support for the dollar, with the US Labor Department publishing October inflation and real earnings figures Wednesday and the Commerce Department releasing retail sales data for October on Thursday.