Dollar falls on reduced fears over protracted strike on Syria

Key Points
  • Investors brush off U.S. retail sales rebound in March.
  • Traders hope for limited military strike against Syria seen
  • Sterling climbs to highest level since January
  • The U.S. Treasury currency report fails to surprise the markets.
Dan Kitwood | Getty Images

The dollar fell broadly on Monday on hopes that a U.S.-led strike on Syria would not escalate, rekindling some appetite for stocks and other risky assets and spurred investors to reduce safe-haven holdings of the greenback.

Government data that showed a rebound in U.S. store sales in March failed to lift the dollar which has been pressured by concerns over a trade war between the United States and China, the world's two biggest economies.

"The action may be more limited than previously thought and that's helped market sentiment," said Eric Viloria, currency strategist at Wells Fargo Securities in Stamford, Connecticut, said of a missile strike against Syria.

The U.S., Britain and France said their bombing was aimed at three chemical weapons facilities in retaliation for a suspected poison gas attack in Douma by the Assad regime. For now, the three Western nations signaled there will be no more strikes.

"The military strikes were well telegraphed and we are seeing a continuation in the broad market theme from last week of a weaker dollar and favorable conditions for risk taking," said Credit Agricole currency strategist Manuel Oliveri in London.

The MSCI world equity index, which tracks shares in 45 nations, rose 0.18 percent, to 511.45.

An index that tracks the dollar against a basket of six currencies fell 0.39 percent, to 89.45. The dollar index hit a two-week low of 89.355 last week.

Despite widening interest rate differentials in its favor and the widest yield gap between two-year U.S. and German debt for nearly three decades, the dollar's performance in recent months has been closely correlated to swings in risk appetite. That is because although the U.S. central bank has kept on track in raising interest rates, broader financial conditions remained loose.

"In any case, we continue to expect healthy economic growth and positive returns for risky assets, so the dollars flight-to-quality attributes should not be a central driver for the time being," Goldman Sachs strategists Zach Pandl and Lorenzo Incoronato wrote in a research note.

In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian rouble, the greenback posted its biggest net short position since August 2011.

The U.S. Treasury semi-annual report released late Friday did not jolt the currency markets, with the Trump administration again refraining from naming any major trading partners as currency manipulators as it pursues potential tariffs and negotiations to try to cut a massive trade deficit with China.

Many major currencies were stuck in narrow ranges, with the euro starting the week up 0.37 percent at $1.2375, a level around which it had traded all last week.

Sterling was an exception. It gained 0.67 percent at $1.4335 line as investors focused on data that could help shore up expectations of a May interest rate hike.