After its worst monthly performance in a decade, the dollar rallied against a basket of rivals on Monday as a squeezing out of crowded short positions combined with safe-haven demand gave the currency some respite.
The dollar index, which measures the greenback against a basket of leading currencies, lost more than 4 per cent in July, its worst month since September 2010. It is down 10 per cent from its peak in March.
Analysts put the slide down to waning safe-haven appeal as financial markets recover, market expectations for further easing of U.S. monetary policy and a lack of agreement among U.S. lawmakers on further fiscal stimulus. Falling U.S. bond yields have also been cited as a factor.
Speculators’ net shorts on the U.S. dollar have soared to their highest since August 2011 at $24.27 billion, Reuters calculations and U.S. Commodity Futures Trading Commission data show.
A partial squeezing out of that crowded short position may be the reason for the dollar’s rally in the past couple of days, analysts said, also citing rising geopolitical tensions between the United States and China.
“There’s usually something that trips global markets up in August, and this year might not be different given the growing list of market risks,” said Viraj Patel, global FX and macro strategist at Arkera.
“Given the way that risky assets have rallied in recent months, this rising geopolitical threat could lead to a squaring off in positions and potential reversal of recent trends that would help the dollar recoup its recent losses.”
The dollar index was up 0.2 per cent, with the greenback higher against all currencies in the basket on which the index is based.
“The factors that have seen DXY (the dollar index) fall 10% from its spike high in March are still in place and we expect a ‘sell the rally’ mentality to develop through August,” ING strategists said in a note to clients.
“We’ll also be focusing on (the U.S.) Congress, where the $600 per month unemployment benefit boost has now expired and the parties are wrangling over the design of the Phase IV stimulus package. Delays here may upset asset markets, which typically tend to struggle a little more in August.” (Reuters)
