U.S. Dollar in Across-the-Board Declines as Bulls Appear to Throw Towel

- USD in widespread losses as bulls throw towel
- After Fed signals slower policy normalisation
- While Asia market recovery aids risk appetite

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U.S. Dollar exchange rates were swept lower in across-the-board declines on Thursday after the Federal Reserve (Fed) signalled a slower pace toward a normalisation of its monetary policy and as a recovery in Asian financial markets helped to support international risk appetite.

Thursday’s declines turned July’s gains for the Dollar Index into losses and chopped back the barometer’s three-month increase significantly after the Fed’s post-policy decision press conference prompted a rethink of market assumptions about the likely point at which it could announce plans to begin winding down its mammoth $120BN per month quantitative easing programme.

Many analysts had come to view September as the most likely point at which the tapering decision would be made and details communicated, although some had most recently even suggested that Chairman Jerome Powell could announce something next month at the annual Jackson Hole Symposium.

“A patient Fed, progress towards an infrastructure deal and some relief in Chinese assets has helped to buoy risk sentiment more broadly. Month-end rebalancing will likely dominate price action into the end of the week. Our signal suggests broad but moderate USD weakness,” says Mazen Issa, a senior FX strategist at TD Securities.

Powell’s remarks at Wednesday's press conference appeared to make clear, however, what was already alluded to in the Fed’s formal statement; that at least one more meeting is necessary before it could make the call.

USD quotes

Above: Selected U.S. Dollar exchange rate quotes and performances over various horizons. Source: Netdania Markets.

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It could now be the case that the Fed is unlikely to announce anything before November given that the next meeting of the Federal Open Market Committee is not until September, with November’s following on after that and before the year ends with a final get-together in the middle of December.

Some still warn however that next month’s Jackson Hole Symposium shouldn’t be ruled out as a source and site of potential movement.

“Dollar bulls will need to be more patient. In terms of timing, the next key risk is now the Jackson Hole Symposium in August, before the September FOMC meeting, which might be when Powell decides to deliver the promised guidance on tapering. In our view, a slightly lower dollar in the interim would offer better entry points to sell EUR/USD in due time,” says Kit Juckes, chief FX strategist at Societe Generale.

Thursday’s U.S. Dollar declines came first and foremost against low-yielding currencies like the Euro, Yen and Swiss Franc, some of which had been popular candidates for funding bullish wagers on the Dollar since June, which was when the Fed first indicated that a tapering of its QE programme is coming slowly but surely onto the agenda for the entire duration of time that U.S. economic circumstances permit.

USD positioning

Source: Societe Generale.

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“According to the CFTC, the FX market is still long both the EUR and USD. But the dynamics are very different: long EUR positioning has been decreasing since last September, while the market only recently turned long USD. The June FOMC meeting triggered this shift on the dollar side, pushing net USD long positioning to the highest level since May 2020,” Juckes says.

Dollar losses were quick to broaden and were most deep against the currencies of countries and economies where central banks have recently raised interest rates with the Brazilian Real and Hungarian Forint among the day's outperformers.

The Dollar remained on its back foot Thursday even after Bureau of Economic Analysis data showed second quarter GDP data missing albeit-elevated expectations by a mile, with the U.S. economy having grown at a still-respectable 6.5% annualised pace last quarter against expectations for an increase of around 8.5%.

Price action also came amid signs of a recovery from greatly-reduced levels in Chinese financial markets, which could also have had knock-on implications for investor sentiment more broadly given the adverse global impact of regulatory actions against some sectors there earlier this week.

“Last week’s decision to overhaul the private tutoring sector (banning core subjects such as math, science, and history alongside tutoring on weekends and public holidays for all children younger than 6) caught the market off-guard and wiped out USD15bn of market cap of education related listed companies in a matter of hours,” says Chris Leung, an economist at DBS Group Research.

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