Why the US Dollar Fell amid Trade War Jitters

US dollar depreciated last week

The US Dollar Index (UUP) posted four consecutive daily declines in the previous week as trade tensions escalated between the US and its trading partners. The interesting thing, however, was that the decline in the US dollar was because of the declining bond yields rather than appreciation of other currencies. The increased positive correlation between the US dollar and the US bond yields was the key driver in the US dollar rally in recent weeks. The decline in bond yields in the previous week owing to increased trade tensions led to the decline of the US dollar for the week ending June 22. The US dollar index closed the week ending June 22 at 94.2, depreciating by 0.63%.

Why the US Dollar Fell amid Trade War Jitters

Speculators turned bearish on US dollar

As per the latest commitment of traders report, released on June 22 by the Chicago Futures Trading Commission, large speculators and traders have increased their bullish positions in the US dollar index. As per Reuters calculations, the net US dollar (USDU) positions moved from short $7.4 billion to long $8.6 billion. 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.

Trade tensions and bond yields to drive US dollar

The key drivers for the US dollar are US bond yields, which are impacted by tariff tensions. If markets remain under pressure, we can expect the bond yields to slide, which could have a negative impact on the US dollar. That being said, there is a lot of support for the US dollar thanks to the diverging monetary policy, which means the decline in the US dollar could be limited.