Have We Seen a Short-Term Bottom for the Dollar?

The US Dollar Index (UUP) managed to close in positive territory in the week ended February 8, 2018, after posting seven consecutive weekly losses. The combination of a hawkish FOMC (Federal Open Market Committee) statement, strong non-farm payroll additions in January, and some profit booking in other major currencies led to the strength of the dollar last week. The US dollar index closed at 89.0, a weekly gain of 0.17%.

According to the latest COT (Commitment of Traders) report released on February 3 by the CFTC (Chicago Futures Trading Commission), large speculators and traders remain bearish on the US dollar. According to Reuters calculations, the US dollar’s (USDU) net short positions increased to -$13.7 billion compared to -$11.5 billion in the previous week. That amount is a combination of the dollar’s 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.

For the US dollar index, a strong technical support lies near the 88.0 level, which was last seen in 2004. The recent low for the index was 88.3, increasing the odds that the US dollar index has reached the bottom. Rising interest rates along with a positive inflation outlook could help limit further losses for the index.

Going forward, the focus of currency traders could be on central banks since rising currency values could warrant some preventative measures from the central bankers of Europe, the United Kingdom, Japan, and Australia. Overall, the outlook for the US dollar remains positive this week, with the focus on the services PMI (Purchasing Managers’ Index), the US spending bill, and FOMC (Federal Open Market Committee) member speeches.

In the next part of this series, we’ll take a look at the reasons for the continued bond market rout.