It’s a tough day for the US Dollar, but here’s why things can look good

The failure of the Federal Reserve to strengthen the ground for a possible reduction in monthly bond purchases continued to be the fault of the US dollar weakening for the second consecutive session on Thursday, with the benchmark index dropping to the lowest level in July.

However, analysts say the weakness could be over the top.

US dollar index ICE DXY,
The currency measure against the basket of six major rivals fell 0.5% to 91.88, its lowest value since June 29. The index fell by 1.1% this week, limiting its increase to 2.2% since the beginning of the year.

The dollar “seems to be taking some hints from the time of the downfall announcement and a bit of disappointment on that front,” said Elsa Lignos, global head of currency strategy at RBC Capital Markets.

Lignos said that before Wednesday’s Fed statement there were speculations that the central bank would prepare the table for the announcement of limiting bond purchases at the September meeting. But it seemed unlikely following the Fed’s announcement that progress would be judged in “forthcoming meetings” and chairman Jerome Powell’s comments at his press conference seemed to indicate that the chances were very low, she said.

To read: Fed says the economy has “made progress” towards containment standards, but not yet enough to start

Market expectations that Powell will announce the abolition plan at the Fed symposium in Jackson Hole, Wyoming next month have also been questioned, she noted, arguing the reaction could be over the top.

See also: The strong but disappointing US GDP report may be bad news for the Fed

“But the time for the first hike has come a little closer, if ever,” she said. “Ultimately, this should be the direction the USD (US Dollar) takes its example, so we see price action after the FOMC as a reversal of USD strength over the past few days, and not something more significant.”

The recent easing of the dollar has only restored some of the sharp gains achieved after the June 16 Fed meeting, which prompted policymakers to tighten monetary policy sooner than expected.

The June meeting may turn out to be a turning point in terms of sentiment around the dollar.

Economists from the Institute of International Finance on Thursday noted that the rally following the June meeting canceled a significant dollar short that had previously built up in the foreign exchange market amid deep concerns about the long-term role of the world’s reserve currency in the global financial system.

“A year ago, there was information about the status of the reserve currency in dollars in the markets. Moods were very negative given the large US budget deficits that were heavily funded by the Fed [quantitative-easing] purchase of Treasury securities, “wrote Robin Brooks, Jonathan Fortun and Jack Pingle.

Based on the currency futures positioning data from the Commodity Futures Trading Commission, the dollar positioning by speculative traders is now flat, which is a big change from the Fed meeting in June and likely paves the way for a long dollar move. posted (see chart below).

Institute of International Finance

“This would be in line with the US outperforming everyone else in terms of fiscal stimulus, which should conceptually shift the rate differential in support of
dollar, ”they said. The rate difference is the difference between the yields in two different countries; higher returns generally attract capital and increase the value of a currency.

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Economists said “radical shifts in sentiment” of the type seen after the June 16 meeting “are rare and usually signal a broader twist. That’s why we expect positioning to turn to long USD soon after having been negative for most of last year. “

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