Here’s What Drove the US Dollar to a Multiyear Low Last Week
US dollar falls on conflicting comments
The US dollar index (UUP) saw a lot of volatility in the week ended January 26, 2018. There were many reasons for the decline in the US dollar. Central bankers in Europe and Japan failed to project a clear picture of their support for continued monetary accommodation, leading to a sharp appreciation of the euro and the yen against the US dollar.
US Treasury Secretary Steven Mnuchin commented at the World Economic Forum in Davos, Switzerland, on January 17 about the advantages of a weaker dollar. President Trump, in his speech the following day, said he wanted a strong dollar, which helped stall the decline of the US dollar. The US dollar index closed the week ended January 26 at 88.9, a depreciation of 1.6%.
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Speculators rush to short positions
According to the latest COT (Commitment of Traders) report released on January 26, 2018, by the CFTC (Chicago Futures Trading Commission), large speculators added short positions on the US dollar. The data were through Tuesday, January 23, before the major decline in the US dollar. There could be a further buildup of short positions since the key dollar-negative news came in after the report.
According to Reuters calculations, the US dollar (USDU) net short positions increased from -$9.6 billion to -$11.5 billion as of Tuesday, January 23. That 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.
Outlook for the US dollar
The FOMC’s (Federal Open Market Committee) January meeting is scheduled to begin on Tuesday, January 30, but there are no new announcements expected at the meeting. This week, the ISM (Institute for Supply Management) manufacturing index on Thursday and the US jobs report on Friday are the important economic events. Overall, the weakness of the US dollar could continue unless there are some strong positive surprises or unexpected announcements by President Trump in his State of the Union address on Tuesday.
In the next part of this series, we’ll see how the bond markets reacted to the possibility of tightening from the European Central Bank and the Bank of Japan.