The U.S. dollar’s selling had paused ahead of Jackson Hole Symposium last week, but then it accelerated again. That was until earlier this morning as since then the dollar has made a small comeback against a number of her rivals due above all to profit-taking. The greenback fell sharply on Friday after Janet Yellen, the Federal Reserve Chairwoman, remained tight-lipped about the future path of U.S. monetary policy. This triggered speculation that the Fed may delay raising rates again until next year.
At the weekend, Hurricane Harvey wreaked havoc in Texas and is set to dump more heavy rain in the coming days. If the economic costs of the hurricane turns out to be significant then the Fed may have to be even more patient in normalising monetary policy. Also weighing on the dollar has been the sharp rise in risk aversion following North Korea’s launch of a missile over northern Japan overnight. Safe haven flows into the likes of Japanese yen, Swiss franc and gold have weighed heavily on the U.S. dollar/Japanese yen (USD/JPY), USD/CHF and USD/GOLD currency pairs. The euro/U.S. dollar (EUR/USD) currency pair has meanwhile sharply extended its rally thanks to an improving Eurozone economy and the European Central Bank’s apparent contentment with the higher exchange rate.
The sharp rises in the yen and in particular the euro, have caused the Dollar Index to fall below the 91.90 key level, the low from last year. Going forward, if the DXY holds below this level then we may see further losses for the dollar, else a short-covering rally would not come as major surprise to me, as the dollar short has become a crowded trade. The dollar selling may pause ahead of the nonfarm payrolls report and this week’s other key U.S. data releases.
However the key support area for the U.S. Dollar Index is below market around 89.60, which was formerly resistance prior to the breakout in late 2014. So, there is the possibility that the dollar may weaken further before potentially bouncing back. Regardless of the DXY’s next short-term move, any move back above the last resistance level at 94.10 would invalidate the bearish bias. Unless that happens, any short-term bounces should be treated with caution.