A rally in the euro was reinforced by dollar losses, prompted by allegations that US president Donald Trump disclosed highly classified information to Russia’s foreign minister about a planned Islamic State operation.
The story about Mr Trump and Russia “probably is playing out as a weaker dollar on the view that Trump may not be around long enough to deliver his tax reform, which is at least partially priced into the dollar”, said RBC Capital Markets currency strategist Adam Cole in London.
The dollar index fell over 0.6%, with the euro up 0.9% to $1.107. The dollar index had reached 14-year highs in early January on the view that Mr Trump’s plans for tax cuts and infrastructure spending would boost growth and inflation. On Wall Street, the S&P 500 and Nasdaq Composite nonetheless touched record highs but later retreated to trade slightly negative. Traders shared concerns about the feasibility of Mr Trump’s agenda of tax cuts and deregulation, without taking their eye off the expected economic growth.
“As long as we have growth, whether it is earnings or economic data, the markets are likely to be able to take such [political] headlines in stride,” said Matt Miskin, senior capital markets research analyst at John Hancock Investments in Boston, referring to the Trump-Russia headlines.
US manufacturing production posted its biggest increase in more than three years in April, bolstering the view that economic growth picked up early in the second quarter — despite a drop to a five-month low in housing starts.
British inflation hit its highest level since September 2013 last month, extending its sharp rise since the vote to leave the EU and tightening the squeeze on living costs. Consumer prices rose by an annual 2.7%, data showed, and they look set to rise further due to the fall in the value of the pound and the recent rise in global oil prices.
Britain’s economy was barely ruffled last year by the shock vote to leave the EU. But the steady rise in inflation since then, combined with weak wage growth, has slowed its momentum this year. The UK opposition Labour Party sought to highlight rising costs for voters as it launched its policy proposals for the June 8 election, pledging a higher minimum wage and state involvement in the energy sector to keep prices down.
Last week, Bank of England governor Mark Carney warned 2017 will be challenging for UK consumers, with inflation now almost certain to overtake wage growth. Oil prices were little changed as traders awaited weekly US inventory data and after Kuwait joined top producers Saudi Arabia and Russia in support of prolonging supply cuts through March 2018 to reduce a global crude glut.
Brent crude traded at $51.88 (€46.76), up slightly. US Treasury yields fell after the housing data added to soft economic news that has raised new doubts over how many times the Federal Reserve will raise interest rates.