What Drove the US Dollar Lower Last Week

US dollar takes a breather

The US dollar index (UUP) took a breather last week, closing at 92.44, 0.03% higher than its close of 92.41 in the week ended May 4. The US dollar’s three-week rally was interrupted by the weak inflation report published last week, which was preceded by a weak jobs report on May 4. This US dollar slowdown could only be a speed breaker as the Fed remains the only central bank expected to tighten policies in the near term. The recently rejuvenated dollar-bond market correlation could continue supporting the dollar against major developed, developing, and emerging market currencies.

What Drove the US Dollar Lower Last Week

Speculators moving into long dollar positions

According to the Commodity Futures Trading Commission’s May 11 commitment of traders report, large speculators and traders trimmed their short positions on the US dollar index last week, from 1,734 contracts to 549 contracts. According to Reuters, net US dollar (USDU) short positions fell from $15.2 billion to $10.8 billion. This amount is a combination of the US dollar’s contracts against combined contracts of the euro (FXE), British pound (FXB), Japanese yen (FXY), Australian dollar (FXA), Canadian dollar (FXC), and Swiss franc.

Key events for the US dollar this week

US growth outlook could be driving currency markets. Flattening growth is likely to limit expectations for policy tightening in developing economies, leaving the Fed as the only major central bank on a path to further tightening. This policy divergence and the restored US dollar-bond market correlation could push the dollar higher or at least limit any major declines. In the next part of this series, we’ll analyze why the euro fell last week.