February 19, 2018 / 4:10 AM / a year ago

Dollar bounces after hitting three-year low

LONDON (Reuters) - The dollar enjoyed a small rebound on Monday as investors bought back the greenback after its plunge to three-year lows, although analysts said any recovery looked set to be brief with dollar bears still out in force.

U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration

The U.S. currency has weakened this year as expectations that central banks will start raising interest rates in other parts of the world erode its perceived yield advantage.

Confidence in the dollar has also been shaken by concerns the United States could pursue a weaker dollar policy and by mounting worries about the U.S. budget deficit, which is projected to balloon to $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts.

That trend of dollar weakness came to an end when a sudden stock-market sell-off in February sent investors fleeing into the relative safety of the greenback.

The return of risk appetite last week has meant the pressure on the dollar has resumed, although on Monday the U.S. currency found its feet as some investors bought in after the recent falls.

The dollar .DXY measured against a basket of currencies rallied 0.3 percent to 89.342. The index is off a low of 88.253 hit last week, which was the weakest level for the U.S. currency since December 2014.

So far this year the dollar has lost almost three percent after tumbling 10 percent in 2017.

Analysts said the market was positioned for only a brief respite for the greenback.

“By and large the sense in the market is that the dollar depreciation is reasserting itself,” said Alvin Tan, a London-based strategist at Societe Generale.

“We are a bit more cautious. The dollar has weakened too fast. We are still looking for dollar weakness this year but we’ve returned to the January trend [of a weaker dollar] too fast,” he said.

A lack of key data on Monday and market holidays in the U.S. and parts of Asia is likely to keep trading quiet, analysts said.

Against the euro, the dollar rose 0.3 percent to $1.2386 EUR= with traders pointing to crucial business surveys later this week that could give the single currency some more direction.

Versus the yen, the dollar gained 0.2 percent to 106.55 JPY= but remained down more than two percent this month and close to 15-month lows touched last week.

“The fact that the dollar sell-off ran out of steam on Friday afternoon does not lead me to hope that it is over,” Commerzbank analysts said in a note.

“The dollar bears did so well recently that there was time for profit-taking ahead of the weekend. That does not mean that they might not be selling dollar again today with renewed enthusiasm,” the analysts said.

The U.S. currency’s outlook remains uncertain in the longer-term, strategists said, particularly as other parts of the world where central banks are tightening policy and economies are strong look increasingly attractive for investors.

The Swedish crown EURSEK=D3 was down 0.3 percent against the euro to 9.910 crowns per euro.

That followed news that banks in Latvia, a country in which Swedish institutions are heavily invested, faced accusations of busting sanctions on North Korea and the central bank governor was detained by the anti-corruption agency.

Analysts said it was not clear to what extent the crown’s weakness on Monday could be attributed to the Latvia developments.

Reporting by Tommy Wilkes; Editing by Mark Heinrich, Robin Pomeroy, Editing by William Maclean

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