Oil’s rally spells trouble for currencies

Jan 29 (Reuters) – Oil’s rally spells trouble for currencies, with current bets against the dollar undermined as the likelihood of hoped-for interest rate cuts are pushed back.

The timing of oil’s rise is bad news for traders who spent the end of last year selling dollars as futures signalled the growing probability that interest rates wouldn’t just fall, but would do so soon.

Expectations for easing cycles are now being challenged by January’s $10 increase in the price of oil which will support inflation and lessen the probability that rates drop soon, perhaps not even as early as the May cut implied by U.S. futures markets.

While that’s bad news for those betting against a dollar that is supported by interest rates higher than those traders are now holding, there are more troubling situations that could spur risk-averse reactions that fuel more demand for dollars.

Japan’s yen – near a record low on a trade-weighted basis, and India’s rupee, Turkey’s lira and South Africa’s rand – all near record lows versus dollar – are likely to come under pressure. Their extreme weakness may spur risk-aversion and demand for safer assets like dollar, gold or Swiss francs.

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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)