What’s Driving the US Dollar Higher?

US dollar appreciates slowly

The US Dollar Index (UUP) continued to appreciate but did so slowly in the week that ended on May 25. Rising political uncertainty in Europe, seesawing trade negotiations between the United States and China, and the diplomatic tussle between the United States and North Korea had an impact on currency markets in the week.

Less-hawkish-than-expected FOMC May meeting minutes led to a fall in the chances of a fourth rate hike and limited the gains in the US dollar. Other factors that supported the US dollar in the week that ended on May 25 were the falls in commodity currencies such as the Canadian and Australian dollars, which were affected by falling crude oil prices.

What’s Driving the US Dollar Higher?

Speculators moving into long dollar positions

As per the latest Commitments of Traders report, which was released on May 25 by the Chicago Futures Trading Commission, large speculators and traders have increased their bullish positions in the US Dollar Index. The number of long contracts has increased from 18 to 2,586 as of May 22.

As per Reuters’ calculations, the sum of US dollar (USDU) net short positions decreased from $9.8 billion to $8.0 billion. This amount is a combination of the US 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.

Key events for the US dollar this week

Risk sentiment is likely to be the key driver for the US dollar in the coming week. Political uncertainty in Europe could keep a lid on the euro, while oil-based economies’ currencies are likely to remain under pressure due to falling crude prices. The US dollar–bond yield correlation is likely to continue, and any positive surprise in the June 1 jobs report is likely to add upward momentum to the US dollar.

Overall, the dollar’s strength is likely to remain intact for lack of any other strong currency. In the next article, we’ll analyze why the euro has been struggling in the past five months.