There’s one thing every investor can agree with this year that the dollar will fall, and as the dollar saw a growth of 2% over the past month, it created confusion. If the federal reserve can halt its increase in interest rates next month as U.S. inflation is cooling, will it affect the dollar and make the dollar fall?
According to the analysts, there are many factors that affect the dollar, one of which is a range of worries basically involved in the U.S. debt ceiling negotiations, the global economy’s outlook, and the health of banks, and these factors are securing the dollar’s reputation.
In the meantime, there are some indications that point towards the Fed hiking their interest rates again, which are more technical factors and related to investor positioning.
Fear
The measure of the dollar against the other six currencies, the dollar index, rose roughly by 2% and went up to 103 from the middle of April. But compared with the 20-year high of 114.78, which was last September, it is still down by 10%.
The mess with the debt ceiling is helping the dollar; that is the only interpretation preferred by the currency analyst. Democrats and Republicans are trying to get closer to reaching an agreement to raise the borrowing ceiling to $31.4 trillion. But still, there are chances of a catastrophic U.S. debt default at a time when many banks appear to be weak.
When the market is under pressure with continuous turmoil, they often choose to buy a few of the riskier assets, meaning assets like gold, dollars, and bonds.
Currency Strategist at Commerzbank, Esther Reichelt, said, “The recent USD strength is largely driven by increased safe-haven demand in view of ‘unknown unknowns’.” “How severe are vulnerabilities in U.S. regional banks, and what might be the fallout of an escalation in the U.S. debt ceiling conflict?”
The worrying signs of global economic growth can affect the purchase of safe-haven assets, and data from China this week showed that its economy was underperforming in April.
It is not finished.
The safe-haven argument is doubted by the head of Asia FX strategy at RBC Capital Markets, Alvin Tan. According to Tan, the S&P 500 index is still flat from the middle of April, and growth of 8% has been observed this year. If the investors were worried, there would be a decline in the stocks.
Tan added that one thing is worrying in this narrative that the Fed has not defeated inflation yet. According to the University of Michigan Survey, which was issued last week, consumer inflation expectations reached a 5-year high in May at 3.2%, which hiked the value of bond yields and the dollar.
Tan is skeptical that the traders are anticipating that the U.S. central bank will lower interest rates in the later half of this year as the chances of a recession are on hold.
“We think there’s a chance that U.S. interest rates could grind higher,” he said. “We remain unconvinced by the argument that the dollar is on a steady decline from here.”
Natural Rebound
Technical factors are at play, according to other analysts. The largest bets are made against the dollar. According to the report from the Commodity Futures Trading Commission, hedge funds and other speculators of net short bets amounted to $14.56 billion last week, and since mid-2021, it has been the biggest position.
Some traders may be forced to close their short positions by purchasing the dollar if the collar rises slightly, which in turn will increase the value of the dollar. Inexplicably, positioning can support the momentum of rallies.
FX strategist at BCA Research said, “The dollar is very, very oversold.” “That’s one technical indicator. But a simple technical indicator is that it is very atypical for you to have a straight-line decline in the dollar.”
