by Harry Robertson
LONDON (Reuters) – If buyers agree on something this 12 months, it is that the greenback goes down. That made the greenback’s 2% bounce over the previous month notably complicated.
US inflation is cooling off and the Federal Reserve may pause its rate of interest hikes subsequent month. So the greenback must be happening, proper?
Analysts say there are doubtless a number of elements at play. One is that a variety of considerations — in regards to the US debt ceiling negotiations, the well being of banks and the outlook for the worldwide financial system — are sprucing the greenback’s safe-haven credentials.
Within the meantime, there are some indicators that the Fed could have to lift charges once more, and that extra technical elements associated to investor positioning are concerned.
DEBT CEILING FEARS
The greenback index, which measures the US foreign money in opposition to six different currencies, has risen about 2% since mid-April to round 103, although it’s nonetheless 10% beneath final September’s 20-year excessive of 114.78. .
The go-to clarification for foreign money strategists proper now’s that the debt ceiling debacle is driving the greenback increased.
Democrats and Republicans are getting nearer to reaching an settlement to extend the debt restrict to $31.4 trillion. However the specter of a probably catastrophic US debt default lingers, at a time when many banks look weak.
When markets face considerations like that, they typically purchase much less dangerous belongings like bonds, gold, and {dollars}.
“The current energy of the USD is essentially attributable to elevated safe-haven demand within the face of ‘unknown unknowns,'” mentioned Esther Reichelt, foreign money strategist at Commerzbank.
“How extreme are the vulnerabilities within the US regional banks and what may very well be the implications of an escalation within the US debt ceiling dispute?”
Some worrying indicators about international financial progress may be contributing to safe-haven shopping for. Knowledge from China this week confirmed its financial system underperformed in April.
THE FED MAY NOT FINISH
Alvin Tan, head of Asia FX technique at RBC Capital Markets, doubts the protected haven argument.
If buyers have been frightened, shares can be falling, he mentioned. In actuality, the S&P 500 Index has been flat since mid-April and is up greater than 8% this 12 months.
Tan mentioned considerations that the Fed hasn’t but stamped out inflation are a part of the story. A College of Michigan survey launched final week confirmed shopper inflation expectations rose to a five-year excessive of three.2% in Could, lifting bond yields and the greenback.
Merchants at the moment anticipate the US central financial institution to slash rates of interest later this 12 months because the recession takes maintain, however Tan is skeptical.
“We predict there’s a probability that US rates of interest will go up,” he mentioned. “We stay unconvinced by the argument that the greenback is falling steadily from right here.”
NATURAL REBOUND
For different analysts, the so-called technical elements are at play.
Traders have made large bets in opposition to the greenback. Internet brief bets by hedge funds and different speculators totaled $14.56 billion final week, knowledge from the Commodity Futures Buying and selling Fee present, the biggest such place since mid-2021.
Counterintuitively, such positioning may also help drive rallies. If the greenback rises barely, some merchants could also be compelled to shut their brief positions by shopping for {dollars}, which will increase its worth.
“The greenback could be very, very oversold,” mentioned Chester Ntonifor, foreign money strategist at BCA Analysis.
“That is a technical indicator. However a easy technical indicator is that it is very uncommon so that you can have a straight-line drop within the greenback.”
(Reporting by Harry Robertson; Enhancing by Paul Simao)
