Dollar Slide Continues

The US dollar lost ground against all the major currencies, save sterling, over the past week, and also fell against most emerging market currencies. There is little from a technical or fundamental perspective, including next week’s FOMC meeting, that suggests a reversal is at hand.

Investors accept that the US economy rebounded in Q2 from another below average Q1 performance. They accept that the jobs market is still healthy. What they doubt is that the Federal Reserve will raise interest rates in the face of price pressures that have moderated. The fiscal course of the Trump Administration is also doubted. Not to put too fine a point on it, but the mess over health care, has left investors with a bad taste of what the legislative meal will look like.

At the same time the trajectory of the US policy mix moves away from the very supportive tighter monetary/looser fiscal policy, negative considerations for Europe have been lifted or substantially reduced. Looking at the charts, the turn came in late April when it became clear the National Front challenge in was going to be repulsed. The political threat in Europe dissipated. The regional economy is enjoying the broadest and strongest expansion in a decade. Given the improvement in the balance of risk, the ECB began adjusting its communication to help prepare the markets for an adjustment in the accommodation. This spurred rise in market rates.

The Dollar Index fell for a second consecutive week. It has fallen in six of the past seven sessions. The week’s 1.25% decline took it blow 94.00, its lowest level since June 2016. This area is important from a technical perspective, and a convincing break could open the door to another 3-5% decline. Daily and weekly technical indicators are over-extended as one would imagine, but only the Slow Stochastics have stopped falling. Given the pace and extent of the Dollar Index slide, and the positioning, we want to be sensitive to any reversal pattern in the coming sessions, but our point is that there is not much nearby chart-based support.