If investors agree on one thing this year, it’s that the dollar will weaken. That made the greenback’s 2 percent rise over the past month particularly puzzling.
US inflation is cooling, and the Federal Reserve may pause interest rate hikes next month.
The dollar index, which measures the value of the U.S. currency against six others, has risen 2 percent since mid-April to around 103, though it is still down 10 percent from last September’s 20-year peak of 114. 78 points. The main explanation for currency strategists right now is that debt ceiling issues are supporting the dollar.
The US dollar’s recent strength has largely been driven by increased safe-haven demand given the “unknown unknowns,” said Commerzbank currency strategist Esther Reichelt.
“How severe are the vulnerabilities of US regional banks and what might be the outcome of an escalating conflict over the US debt ceiling?” she asks.
Some worrisome signals about global economic growth may also be contributing to safe-haven buying. Data from China this week showed the economy underperformed in April. Alvin Tan, head of currency strategy for Asia at RBC Capital Markets, doubts the security argument.
Investors have made big bets against the dollar. Net short bets by hedge funds and other speculators totaled $14.56 billion last week, data from the Commodity Futures Trading Commission showed. This is the largest such position since mid-2021.
Counterintuitively, this positioning can help fuel rallies. If the dollar rises slightly, some traders may be forced to close out their short positions by buying the greenback, which then raises its value.
“The dollar is very, very oversold,” said Chester Tonifer, currency strategist at BCA Research. This is a technical indicator. But a simple technical indicator is that it’s very atypical for you to have a straight-line decline in the dollar,” he added.
2023-05-18 18:49:56
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