Forex

Column-Dollar won’t fall as rest of world won’t let it: Mike Dolan

Published

1 week ago

October 9, 2024

By Mike Dolan

LONDON (Reuters) – The dollar just had its best week in two years, showing once again how dangerous it can be to bet against the U.S. currency if the rest of the world just won’t let it drop.

The DXY index, which tracks the dollar against the most widely traded global currencies, surged more than 2% last week – a stunning whiplash, not least for the many speculators who were short on the greenback and waiting for it to swoon.

While the rally was supercharged partly by the blowout U.S. employment report – and related rethink on the Federal Reserve’s interest rate trajectory – the dollar’s rebound was well underway before Friday. The payrolls figures merely put the icing on the cake.

The main catalyst for the renewed dollar strength was the clear signals coming from central banks in Europe and Japan that any efforts by the Fed to up the ante on rate cuts would be matched in kind.

The rest of the world’s major central bankers certainly took note of the Fed’s outsize 50 basis point opening salvo last month in what it flagged as a 250 basis point easing cycle.

The move was followed by a series of pointed comments from chiefs and governors of the European Central Bank, Bank of England and Swiss National Bank. They all suggested their own decks were being cleared for accelerated easing as well.

While the Bank of Japan had been moving in the opposite direction, both the BoJ and the country’s new prime minister threw cold water on plans to further ‘normalize’ policy with higher rates following the Fed’s large cut.

Add to that signs that the SNB is already intervening in currency markets to cap the rise of the Swiss franc, ongoing intervention from the Reserve Bank of India, and even a rebound in China’s foreign currency reserves, and it’s easy to see why the dollar’s long-forecast downward path has been frustrated.

‘STAGGERING’ ACCUMULATION OF US ASSETS

But the really big capital shifts buoying the dollar in less in the public than the private space and reflect the seemingly insatiable appetite of overseas investors for U.S. assets.

Societe Generale (OTC:)’s currency strategist Kit Juckes this week puzzled over why the dollar is rising again so shortly after the Fed has started cutting rates. He noted that the two previous multi-year dollar rallies over the past 50 years were completely reversed after Fed easing commenced.

Juckes highlighted data showing that Japanese trust funds have already resumed buying U.S. Treasuries and overseas demand for dollar call options is rising. The quick return to already overcrowded U.S. markets is, in his words, “taking U.S. exceptionalism to new levels.”

So the dollar remains stubbornly over-valued: the real, broad trade-weighted index is still some 30% above levels seen 10 years ago. This is creating growing disquiet about the sheer scale of global exposure to U.S. assets, the peculiar twist that has on the dollar exchange rate and its effect on U.S. competitiveness and the reemergence of anxiety about ‘global imbalances’ that was prevalent 20 years ago.

SocGen strategist Juckes highlighted that foreign investors had increased their net holdings of U.S. assets by a “staggering” $40 trillion since 2020 – making it all the more remarkable that this thirst hasn’t yet been slaked.

“I’m certain that a weaker dollar would help reduce some of the imbalances in the global economy, but if investors have so little confidence in their domestic policies and asset markets that they are already returning to the U.S., how does it happen?” he said.

What’s more, there’s little or no sign that U.S. investors have the remotest interest in underperforming overseas markets.

U.S. mutual fund numbers have seen net outflows from global equities over the last month, a fairly consistent trend since the Fed began raising interest rates in March 2022.

So what could shake investors’ unerring faith in the resilience of the U.S. economy, and by extension, the greenback?

Geopolitical concerns are certainly as high as we’ve seen in many decades. But this, arguably, increases safe haven demand for dollars, encourages U.S. money to hunker down at home and enhances the attraction of unrivalled U.S. scale and liquidity.

Could the U.S. election or threats to U.S. democracy and institutions rankle investors?

Certainly a return of Donald Trump to the presidency following the Nov. 5 election may raise concerns, not least given Trump’s well-aired support for both a weak dollar and political control of the Fed.

But it’s telling given that that even with the White House race on a knife edge, the world still appears determined to keep the dollar aloft.

The opinions expressed here are those of the author, a columnist for Reuters

Forex

US dollar gains as US election draws nearer – UBS

Published

22 hours ago

October 16, 2024

Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.

A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.

“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.

Where does this leave us now with our USD views?

Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.

Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .

The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.

Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.

Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.

With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.

At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.

Forex

Sell euro rallies around the ECB meeting – Citi

Published

22 hours ago

October 16, 2024

Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.

Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.

“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.

That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”

There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.

“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”

At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.

Forex

Dollar gains on trimmed rate expectations; sterling weakens post inflation

Published

22 hours ago

October 16, 2024

Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.

At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.

Dollar helped by trimmed rate cut expectations

Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.

Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.

Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.

Sterling slumps after inflation release

In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.

The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.

This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.

“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.

“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”

traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.

The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.

“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.

Yuan nurses weekly losses

fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.

China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.

rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.

data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.