The dollar has also been facing pressure amid moves among BRICS and a few other nations to diversify their currency reserves away from the dollar and use alternative currencies for trade purposes.
The dollar has recouped most of its losses seen since last Friday when the U.S. Dollar Index (DXY) retreated below the 98 level to a one-month low.
Friday’s weakness stemmed from Federal Reserve Chair Jerome Powell’s suggestion in his Jackson Hole address that a rate cut could be forthcoming at the September meeting.
DXY was down 0.04% at $98.39 early Tuesday after it ended 0.73% higher at $98.43 on Monday. The Invesco DB US Dollar Index Bullish Fund (UUP), meanwhile, advanced 0.80%.
The UUP is an exchange-traded fund (ETF) that provides a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
The dollar is likely to be choppy this week as forex traders sift through key data that has implications for the near-term interest rates. A falling interest rate environment is negative for the dollar as it reduces U.S. investment appeal among foreign investors and, in turn, tempers demand for the greenback.
The weekly jobless claims data, the advance second-quarter GDP data, and the July personal income and spending report, which comprises the Fed’s favorite inflation gauge — the price consumption expenditure index — are among the data that can cause a flutter in the currency market.
The dollar has also been facing pressure amid moves among BRICS and a few other nations to diversify their currency reserves away from the dollar and use alternative currencies for trade purposes. President Donald Trump’s tariffs have exacerbated this move.
After starting the year at 108.53, the DXY pulled back sharply, coinciding with the announcement of Trump’s Liberation Day tariffs. Although the index recovered slightly from the lows, it came under renewed selling pressure amid the tariff uncertainty.
It fell as low as 96.38 on July 1 but has mainly been seeing a consolidation move under 100.
Source: Koyfin
For the year, the DXY has lost 9.4% and the UUP ETF about 6.36%
In a report released in early August, Morgan Stanley said it expects the U.S. dollar to lose another 10% by the end of 2026. The firm noted that the greenback fell about 11% in the first half of the year, marking the largest decline in more than 50 years and ending a 15-year bull cycle.
“We’re likely at the intermission rather than the finale,” says David Adams, head of G10 FX Strategy at Morgan Stanley. “The second act for the dollar’s weakening should come over the next 12 months, as U.S. interest rates and growth converge with those of the rest of the world.”
The firm also cautioned about forex hedging by overseas investors holding dollar-denominated assets, which could further pressure the greenback.
JPMorgan analyst Mary Park Durham is bracing for a “prolonged dollar decline, similar to the 2002-2008 period, given its high starting value.” In a note released on Aug. 14, the analyst said despite the potential for further weakness, the dollar’s reserve currency status remains intact due to its trustworthiness and the lack of a viable alternative, among other reasons.
“While its share of foreign currency reserves, currently at 58%, may continue to gradually decline as some central banks diversify into assets like gold, it is far from being replaced,” she added.
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