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Equity Market Rout Stalled: Will US Dollar Resume Its Slide?

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US dollar gives up its gains

The US Dollar Index, whose slide had been stalled in the past two weeks, saw losses as markets recovered last week. The demand for the US dollar as a safe haven waned as risk appetite increased across the board. Major currencies like the euro, pound, and yen managed to claw back their losses from the previous weeks as investors returned to riskier assets. Better-than-expected inflation growth should have increased the demand for the US dollar, but the surprise reaction of equity markets was also seen in the forex markets with the US dollar sliding against the major currencies. The US Dollar Index (UUP) closed for the week ending February 16 at 89.0, which was a weekly loss of 1.5%.

Speculator positions as of February 13

As per the Chicago Futures Trading Commission’s latest “Commitment of Traders” report, released on February 16, large speculators and traders sharply decreased their bearish bets on the US dollar.

As per Reuters calculations, the US dollar (USDU) net short positions increased to -$8.2 billion as compared to -$12.9 billion in the previous week. This amount is a combination of US dollar contracts against the combined contracts of the euro (FXE), the British pound (FXB), the Japanese yen (FXY), the Australian dollar (FXA), the Canadian dollar (FXC), and the Swiss franc.

Will the US dollar resume its slide?

The resurgence of risk appetite could mean a further slide for the US dollar. The other major currencies like the euro and the pound are poised for further gains backed by economic improvement despite their respective central banks trying to calm rapid currency appreciation. The US dollar could also receive some support in the form of rising rates in the US and would partly depend on the FOMC meeting minutes due on Wednesday. The US Dollar Index could find support around the 88.0 level, which has not been breached since December 2014. In the next part of this series, we’ll analyze the bond market performance in the previous week.

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