The relatively resilient growth in the rest of the world versus the U.S. and the Fed easing could make for an “active risk-on” environment, fueling gains in both risk and rate-sensitive currencies, which are cheap, a strategist said.
The U.S. dollar is seen extending its gains early Thursday as the relief rally set off by the Federal Reserve’s decision to take the interest rate down by a quarter-point for the first time this year continues to play out.
The U.S. Dollar Index (DXY), which ended Wednesday’s session up about 0.25% at 96.87 after the Fed decision, has tacked on more gains in the overnight session. At last check, the DXY was up 0.34% at $97.20, which, however, marks a 10.4% drop for the year-to-date (YTD) period.
The Invesco DB US Dollar Index Bullish Fund (UUP), an exchange-traded fund (ETF) that tracks the performance of the Deutsche Bank Long US Dollar Index (USDX) Futures Index, has lost 7.5% this year. In comparison, SPDR S&P 500 ETF (SPY), an ETF tracking the S&P 500 Index, and the Invesco QQQ Trust (QQQ) have gained 13.14% and 15.71%, respectively, for the year.
On Stocktwits, retail sentiment toward the UUP ETF worsened to ‘bearish’ (40/100) from ‘neutral’ a day ago. The message volume on the stream was at ‘low’ levels.
The U.S. dollar had fallen to a four-year low against the euro before the Fed decision.
Wells Fargo Emerging Market Strategist Brendon McKenna said the pullback in Asian currencies against the dollar on Thursday is due to the Fed and Chair Powell remaining non-committal to additional rate cuts, according to a Bloomberg report.
“‘Risk management cut’ in particular, I interpreted as somewhat hawkish,” he said.
The report also stated that TD Securities analysts remained cautious about the dollar’s rebound. “We remain bearish on the U.S. dollar and see any technical U.S. dollar bounces as good opportunities to sell,” analysts at the firm said.
The relatively resilient growth in the rest of the world, combined with the Fed’s easing, could create an “active risk-on” environment, fueling gains in both risk- and rate-sensitive currencies, which are currently cheap — such as the Japanese yen and Australian dollar, they added.
Rabobank strategist Jane Foley saw the uptick in the dollar as due to short-covering, according to a separate Bloomberg report. “Since a lot of Fed easing was priced in ahead of yesterday’s meeting and given the market has been short dollars for some time, the tone thus triggered a little covering of dollar shorts,” she said.
Credit Agricole strategist Valentin Marinov concurred with the view. “Currency investors are squaring their dollar shorts after the Fed failed to validate the uber dovish market expectations ahead of its September policy meeting,” he said.
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