US dollar struggles amid geopolitical tensions
The US Dollar Index (UUP) struggled in the previous week as geopolitical tensions dominated markets across the globe. The escalation of tensions between the US and North Korea had a negative impact on the US dollar in the previous week. Usually, the US dollar appreciates when geopolitical risks arise, but this time the concerns involved the US, so other major safe-haven currencies like the Japanese yen and the Swiss franc appreciated. The US Dollar Index closed the week ending August 11 at 93.0 as compared to 93.4 in the previous week.
Speculator positions on the US dollar continued to fall
As per the latest commitment of traders (or COT) report, released on August 11 by the Chicago Futures Trading Commission (or CFTC), large speculators and traders have added to their bearish positions on the US dollar for the seventh straight week. As per Reuters’ calculations, the net US dollar (USDU) positions rose to -$10.2 billion as compared to -$5.3 billion in the previous week. This amount is a combination of the US dollar’s contracts against the combined contracts of the euro (FXE), British pound (FXB), Japanese yen (FXY), Australian dollar (FXA), Canadian dollar (FXC), and the Swiss franc.
Will the US dollar gain or lose this week?
Markets are currently pricing in a very slim chance of the escalation of war between the US and North Korea. Historically, the US dollar depreciated when the US went to war. In the event of a war, the Japanese yen and the Swiss franc have appreciated the most, while most of the emerging market currencies and commodity-dominated currencies depreciate against the US dollar. We expect a minor drop in volatility this week, but another tweet storm or more threatening words from Trump could increase the pain for the US dollar.
In the next part of this series, we’ll analyze how the bond market reacted to last week’s rise in volatility.