LONDON (Reuters) – The dollar surged to nearly 17-month highs on Monday against a basket of major currencies as investors sought out the liquid and high-yielding currency against a backdrop of global growth worry and rising political risk in Italy and Britain.
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A 2-percent oil price jump initially supported European equities but the gains fizzled rapidly as fears grew for Italian lender Carige whose shares were suspended after reports of a capital hole.
Many also reckon that US President Donald Trump could turn up the heat over trade, further damaging China’s economy.
All that, coupled with European political risks, conspired to push the dollar 0.6 percent higher against a basket of currencies. Sterling fell 1 percent while the euro, which comprises more than 50 percent of the dollar index, fell 0.7 percent to its lowest since July 2017.
“King dollar has staged a return,” Valentin Marinov, head of G10 FX strategy at Credit Agricole, said, adding that investors had piled back into the dollar after last week’s US Federal Reserve meeting confirmed a rate-tightening path.
“Euro and pound are both hurt by political risk and that is aggravating underperformance versus the dollar,” Mr Marinov said.
In Britain, Prime Minister Theresa May was forced to abandon plans for an emergency cabinet meeting to approve a Brexit agreement, the Independent news website reported, stoking fears that the government might not be able to secure a deal that satisfied both the European Union and members of the ruling party.
Latest futures data showed net short sterling positions registered their biggest weekly rise in 1-1/2 months
Deutsche Bank analysts, however, predicted more pain, telling clients: “not enough risk is priced into sterling given the parliamentary problems ahead”.
For the euro, Italy was the main focus, with Rome facing a Tuesday deadline to submit a revised budget to the EU.