Dollar drifts higher, but outlook bleak on US political uncertainty

Key Points
  • U.S. plans to impose China tariffs, weighs on dollar
  • U.S. retail sales fall, give Fed reason to tighten gradually
  • ECB's Draghi strikes dovish tone in speech
Dollar bills with Euro notes
Dan Kitwood | Getty Images

The dollar edged higher on Wednesday after three straight days of losses, as investors booked profits on their short currency bets, but the outlook remained murky amid political uncertainty in the Trump administration and renewed worries about trade wars.

U.S. President Donald Trump's firing of U.S. Secretary of State Rex Tillerson on Tuesday, a week after the resignation of U.S. economic adviser Gary Cohn, has underscored an uncertain environment in the administration that is sure to scare away top-level talent, analysts said.

Tillerson was replaced by Central Intelligence Agency Director Mike Pompeo, who is said to mirror Trump's hard-line stance on international political issues.

More confident than in the past that inflation is on the right track: Draghi

The move has "fanned worries about a more protectionist and isolationist faction of the president's advisors gaining power within the administration," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Apart from the political revolving door in Trump's cabinet, investors grew concerned again about increased protectionism in his government. Trump is seeking to impose tariffs on up to $60 billion of Chinese imports and will target the technology and telecommunications sectors, two people who discussed the issue with the Trump administration said on Tuesday.

The news comes before a G20 meeting next week where the world's leaders will pledge to fight unfair trade practices and stress the role of global trade rules.

On the economic front, U.S. retail sales data on Wednesday did not really help the dollar. Retail sales fell, offsetting a stronger-than-forecast rise in domestic producer prices last month. That should further prompt the Federal Reserve to raise interest rates at a gradual pace. The market still expects the Fed to raise rates three times this year, starting at next week's monetary policy meeting.

"Retail sales have been weak for some time, suggesting it was not weather-related," Stifel chief economist Lindsey Piegza told the Reuters Global Markets Forum chat room on Wednesday. "As such, the Fed has to consider the possibility of a weaker growth ahead."

Effects of past labor market reforms may now be showing: ECB's Draghi

In midafternoon trading, the dollar index was up 0.1 percent at 89.73, within striking distance of a one-month low of 89.40.

Against the , the dollar was down 0.3 percent at 106.29, having slipped overnight from a two-week high as caution over a political controversy in Japan waned slightly.

Elsewhere, the euro hit the day's lows after European Central Bank President Mario Draghi struck a dovish tone in his speech. It was last down 0.2 percent at $1.2369. Draghi said the ECB needs further evidence that inflation is rising towards its target but is growing more confident it is on track to do so.