Dollar hits a year-low, global stocks rally set to end over strong euro

The US dollar sank to its lowest in more than a year against key world currencies on Friday as investors assessed comments from the European Central Bank (ECB) and obstacles to US President Donald Trump's domestic agenda, while world stock markets were poised to snap a 10-session streak of gains.

Gains in the yen, gold and US Treasuries pointed to moves into safe-haven assets compared with stocks that are considered riskier. Oil prices sank more than 1 per cent.

The euro built on sharp gains from a day earlier, rising to near two-year highs against the dollar and undermining European stocks, with Germany's DAX equity index down 1.7 per cent.

ECB President Mario Draghi said on Thursday financing conditions remained broadly supportive, and that the euro's appreciation had "received some attention." However, he did not cite that as a problem nor did he directly try to talk the currency down.

"The fact that Draghi didn't necessarily argue too much against the strength of the euro... certainly gave the greenlight for individuals to want to own the currency again or actually add to their positions," said Dean Popplewell, chief currency strategist at Oanda in Toronto.

MSCI's gauge of stocks across the globe shed 0.32 per cent, falling after 10 days of gains.

US stock indexes opened lower, pulling back from record high levels reached earlier in the week.
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European Central Bank keeps easy money stance despite better growth

The European Central Bank left its ultra easy monetary policy stance unchanged as expected on Thursday, keeping rates at record lows and even leaving the door open to more asset buys if the outlook worsens.

After ECB chief Mario Draghi raised the prospect of policy tightening last month, he signalled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about a long-awaited tapering of its asset buys.

"We need to be persistent and patient because we aren't there yet, and prudent," Draghi told his regular news conference after a meeting of ECB policy-makers in Frankfurt.

He stressed that the bank's governing council were unanimous both on the decision to keep its guidance unchanged and to avoid setting a precise date for a discussion of future policy, noting only that it would occur in the autumn.

With the euro zone economy now growing for the 17th straight quarter, its best run since before the 2007-08 global financial crisis, that at least suggested the ECB is starting to contemplate easing off the accelerator, preserving some firepower after printing nearly 2 trillion euros to jump start growth.

The prospect of reduced monetary stimulus has kept financial markets edgy, with investors sifting through clues to gauge how big central banks around the globe will unwind unconventional policy that have kept borrowing costs at rock bottom.
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UK election 2017: Why the hung parliament spells trouble for its economy

Theresa May’s snap election wager has backfired. The supposed “Brexit election” was intended to signal the public’s support for the prime minister’s approach to the UK’s departure from the European Union. Instead, it has left her incredibly weak, without even a majority in government and her future as leader uncertain. And the economic data reflects this.

Markets hate uncertainty. One measure that tracks this is the UK’s index of Economic Policy Uncertainty, which shows diminishing confidence around the country’s economic resilience. It is calculated by tracking daily articles relating to economic and political unrest in more than 650 newspapers in the UK. The higher the number, the more turbulent the economic outlook. The index surged from 286 on May 18, 2017 to a staggering peak of 521 on June 8 2017, the day of the general election.

This is significant because higher levels of uncertainty are associated with greater stock price volatility and reduced investment and employment in key areas of the economy like healthcare and infrastructure.

The UK’s rising uncertainty levels stretch back to its EU referendum on June 23, 2016. Since then, GDP growth increased by only 0.84% while inflation rose by 1.09%. Uncertainty around the UK’s future relationship with the EU and the Brexit negotiations has caused sharp movements in currency markets as a result of investors hedging their bets and speculating on trades. The day after the referendum, the euro to sterling exchange rate fell by a massive 6.2% overnight, while economic policy uncertainty hit a record value of 2,661. It fell a further 5.1% from June 2016 to May 2017 and 3.42% during the month of May 2017, alone.

The next graph shows the daily linkages between the euro to sterling exchange rate changes and economic policy uncertainty since May triggered Article 50 on March 29, 2017. A negative value implies that as the uncertainty index increases, the sterling to euro exchange rate tends to fall.
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