Dollar rises after sharp selloff

by Jonathan Adams
dollar index

The dollar index, which tracks the U.S. unit against six main peers, was 0.26 per cent higher at 105.52

The U.S. dollar advanced on Tuesday as a sharp selloff last week was seen as overdone in the short term, while the euro was dented by weak German data and the Australian dollar slipped after the country’s central bank hiked interest rates but signalled the hike was the last of the current tightening cycle. The Japanese yen also weakened back above 150 against the dollar, a level that has kept traders on edge in recent weeks as they look for indications of intervention from Tokyo.

The dollar index which tracks the U.S. unit against six main peers, was 0.26 per cent higher at 105.52. It dropped 1.4 per cent last week, its sharpest weekly drop since mid-July.

This dollar bounce we are having yesterday and today is really a correction to what happened last week, which I would say was a one-two punch between the Fed and the jobs data, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The U.S. currency declined last week after Fed Chair Jerome Powell took a more dovish tone than expected at the conclusion of the U.S. central bank’s two-day policy meeting on Wednesday, when it left interest rates unchanged. A softer-than-expected U.S. jobs report on Friday added to the dollar’s weakness.

If you look at the percentage of currencies that have been lower versus the dollar over the last 26 weeks, it was approaching 100 per cent, and data also showed very long dollar positioning. So we got a reversal of some of those positions sparked by the jobs report, said Chester Ntonifor, foreign exchange strategist at BCA Research.

Traders are now pricing in only a slim chance of a further interest rate hike by the Fed and see three 25 bps rate cuts by next November.

As the U.S. economy slows, the dollar may also see further weakness.

Data next week is expected to show softening consumer price inflation and a drop in retail sales, which “feeds into the headwinds that people are talking about – the resumption of student loans, higher interest rates biting the consumer,” Chandler said. The dollar’s rally, particularly since July, was fuelled by a divergence and now we are going to get convergence – but not because of good news from overseas, but more because we are getting worse news from the U.S., Chandler said.

Disclaimer: The opinions expressed by our writers are their own and do not represent the views of Trading and Investment News. The information provided on Trading and Investment News is intended for informational purposes only. Trading and Investment News is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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