Dollar touches five-month peak as euro slides on Italy concerns

NEW YORK —  The dollar rose to a five-month high against a basket of major currencies on Friday, helped by weakness in the euro as investors fretted about political uncertainty in Italy.

The dollar index has climbed for five straight sessions, posting a 1.2 per cent weekly gain. It has risen 5 per cent since mid-February, with investors betting US interest rates will need to rise further to curb inflation.

However, Shaun Osborne, chief FX strategist at Scotiabank in Toronto said the dollar's rally was more about extreme short positioning that needed to unwind.

"We continue to view dollar gains as a temporary issue, reflecting excessive short positioning and concerns European growth momentum has slowed and may impair the ECB's [European Central Bank] willingness to move away from quantitative easing later this year," Osborne said. 

The euro on Friday tracked its fifth successive weekly decline versus the dollar, its first such fall since 2015. Europe's single currency has dropped about seven cents in three weeks amid a sharp dollar rally. 

Concerns have also mounted about the agreement between Italy's far-right League and 5-Star Movement on a governing accord that would slash taxes and ramp up welfare spending.

In late trading, the euro fell to a five-month low of $1.1753. It has declined nearly 1.2 per cent versus the dollar this week.

The dollar index, meanwhile, rose to 93.83 on Friday, the highest since mid-March.

Piotr Matys, FX strategist at Rabobank in London, said based on technical analysis, it is possible that the dollar index had a "valid bullish breakout".

"It is reasonable to assume that the US dollar index is likely to revisit the next important tops at 94.219 and 95.149 in the coming weeks," Matys said. "A close above these levels would strengthen the upside bias."

On Friday, the dollar set a fresh four-month high against the yen but was last flat at 0.1 per cent, supported overall by a further rise in US Treasury yields that suggests an upbeat outlook for the world's largest economy. 

In a note to clients, however, strategists at Citibank said the dollar rally would not last long, citing the US budget deficit, which is projected to balloon to more than $1 trillion in 2019. That would contribute to a 5 per cent drop in the dollar index over the next 12 months.

In the week ahead, investors are looking to Wednesday's release of minutes from the Federal Reserve's latest monetary policy meeting for clues about the pace of the current tightening cycle.