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UPDATE: Dollar breaks 5-day losing run, but analysts remain downbeat1-3-18 3:04 PM EST

By Sara Sjolin, MarketWatch , Anneken Tappe

Emerging markets rally on global growth hopes

The U.S. dollar advanced on Wednesday, halting its recent selloff and breaking a five-session losing streak as traders waited for the latest update from the Federal Reserve.

Better-than-expected manufacturing and construction data helped the currency advance against a basket of its rivals in the first half of the session, while the release of the Federal Reserve's Open Market Committee minutes pushed it slightly higher in the afternoon.

What are currencies doing?

The ICE U.S. Dollar Index rose 0.3% to 92.180, rebounding from a more-than three-month low reached on Tuesday (http://www.marketwatch.com/story/dollar-slumps-for-5th-straight-day-to-lowest-since-september-2018-01-02). The broader WSJ U.S. Dollar Index , which measures the buck against a wider range of currencies, rose 0.2% to 85.84.

The euro fell to $1.2015 from $1.2061 late Tuesday in New York, when the shared currency traded around its highest dollar level since January 2015.

The pound dropped to $1.3514 from $1.3589 on Tuesday, yanked lower by a disappointing reading on the U.K. construction sector.

The yen was largely flat against the dollar, with the greenback buying Yen112.53compared with Yen112.29 on Tuesday.

Elsewhere, manufacturing data and commodity prices around the world are pointing at a good start to the year for global growth, pushing emerging markets currencies higher.

The Mexican peso rose 0.8% against the greenback, with one dollar last buying 19.3910 pesos, up from 19.5370 pesos.

Similarly, the South African rand was up 0.8% against its U.S. counterpart and one dollar bought 12.3632 rand, compared with 12.4571 late Tuesday in New York.

In Asian EM's, the Indonesian rupiah and the Thai bhat strengthened 0.4% and 0.3%, respectively against the dollar.

What is driving the markets?

Analysts said the dollar strength was more a pause from the selloff rather than a turnaround for the U.S. currency, which remained bound by a relatively tight range on Wednesday, despite positive economic data and the release of the FOMC minutes.

ING pointed to a range of factors bearish on the dollar, including uncertainty over how the Republican tax bill will impact the economy, an unsettled political backdrop ahead of the November midterms and "better goldilocks investment opportunities outside of the U.S."

"The latter two factors in particular is seeing the dollar lose its role as an investment currency -- and trading under new rules where an environment of rising U.S. rates no longer guarantees dollar strength," said Viraj Patel, foreign exchange strategist at ING, in a Wednesday note.

The minutes from December's FOMC meeting, in which the Fed raised interest rates by 25 basis points, revealed that committee members were divided with regards to the number of rate hikes (http://www.marketwatch.com/story/fed-minutes-show-divide-over-its-own-forecast-of-three-rate-hikes-this-year-2018-01-03) in 2018. The Fed's forecast projects three increases.

The committee further expects a modest increase of capital spending on the back of the tax reform plan, but also cautioned that the tax windfall shouldn't be used to boost spending.

What are strategists saying?

"The range on the dollar is still tight, and I don't think anything emerged from the FOMC minutes that changed the market's stance on the dollar," said Shabab Jalinoos, head of macro trading desk strategy at Credit Suisse, of the relatively muted reaction in the greenback.

"AUD/JPY is a good gauge of market sentiment and is threatening a correction. Could this be a harbinger for a near term shift in sentiment again? It is too early to say for sure, but as the U.S. dollar sees a mild rebound this morning these moves have tended to be seen as another opportunity to trade the trend recently," said Richard Perry, market analyst at Hantec Markets, in a note.

The Australian dollar-yen pair traded at 87.936 on Wednesday, close to its highest level since early November.

What are the data?

The ISM manufacturing index for December came in at 59.7, beating the MarketWatch consensus forecast of 58, and the November read of 58.2.

Construction spending for November meanwhile grew by 0.8%, exceeding the consensus estimate of 0.5%.

-Anneken Tappe; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

01-03-18 1504ET

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