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Currency Trading: Peso Moves Higher as Trump Trades Fade -- WSJ

19 Jul 2017 6:34 am

A nearly 19% gain vs. dollar this year comes as Nafta fears ease, U.S. inflation stays flat
By Ira Iosebashvili and Saumya Vaishampayan 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2017).

The Mexican peso rose to its highest level against the dollar in more than a year, highlighting the reversal in several postelection trades as President Donald Trump's policy agenda stalls.

The peso has rebounded from a steep postelection fall and is up almost 19% this year at $0.057224, its highest level since May 2016. That means one dollar buys roughly 17.48 pesos.

The currency's latest surge came after a U.S. roadmap for renegotiating the North American Free Trade Agreement fell short of Mr. Trump's protectionist campaign rhetoric, easing fears that a new deal would hurt Mexico's export-dependent economy.

The peso's rally has been one of several sharp turnarounds that have played out in financial markets over the past few months, as political wrangling has made it increasingly unlikely that the administration will push through market-boosting policies such as tax cuts, regulatory rollbacks and infrastructure spending.

The dollar hit a new 9 1/2 -month low Tuesday and has fallen 6.5% this year, based on the WSJ Dollar Index, as investors bet that the Federal Reserve will raise interest rates at a gradual pace amid uneven U.S. economic data and falling expectations of fiscal stimulus.

Investors have moderated bets on industrial stocks, which would benefit from infrastructure spending, while pouring money into large-capitalization technology stocks that have produced better-than-average returns since the financial crisis. Signs of improving global growth are boosting emerging markets, which many believed would suffer if the White House implemented harsher trade terms.

Tuesday's moves came after some Republican senators declined to back efforts to overhaul health care, the latest blow to the party's top legislative priority. The failure to repeal the Affordable Care Act is "just the last straw," said Andy Ji, Asian currency and rates strategist at Commonwealth Bank of Australia in Singapore. "The health-care bill is just a small part of the big puzzle."

Bets on a surge in growth and inflation under the new administration have also unwound as disappointing inflation data in the U.S. and the prospect of tighter monetary policy in other developed economies have fed declines in the U.S. currency.

U.S. inflation was flat in June compared with the previous month, and consistently low inflation readings could give Fed officials a reason to hesitate before raising interest rates again. Higher rates make the dollar more attractive to yield-seeking foreign investors.

The yield on the benchmark 10-year U.S. Treasury note settled Tuesday at 2.263%, down from 2.446% at the end of last year.

"The U.S. is having difficulty passing its agenda," said Alvise Marino, a currency strategist at Credit Suisse. "Add that to a pretty dovish Fed, and you get a poor picture for the dollar overall."

A narrowing gap between rates in the U.S. and abroad may also be detrimental to the dollar. The Bank of Canada raised rates for the first time in seven years last week, while top officials at the European Central Bank and Bank of England have hinted they could also begin to tighten monetary policy in the near term. The ECB is set to deliver its next policy decision Thursday.

At the same time, abating political risk and an expected decline in Mexican inflation will likely benefit the peso, said Juan Carlos Rodado, director of Latin American research at Natixis. "In January, it looked like the world was going to fall apart," he said. "But nothing happened."

Write to Ira Iosebashvili at ira.iosebashvili@wsj.com and Saumya Vaishampayan at saumya.vaishampayan@wsj.com

(END) Dow Jones Newswires

July 19, 2017 02:34 ET (06:34 GMT)

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