Dollar Snaps Two-Week Advance, While Japanese Investors Resume Repatriating Funds

The US dollar suffered broadly last week. It fell against the all major currencies and most of the emerging market currencies. There were two main drivers. The first was the heightened geopolitical risks. The US launched a missile strike against Syria’s government forces in retaliation for its use of chemical weapons.

The US also dropped the largest non-nuclear bomb on IS bunkers in Afghanistan. At the same time, it sent an aircraft carrier group toward North Korea. While the fear of that the Trump Administration was going to be isolationist has subsided, there is a concern about unilateralism and the seeming lack of an overarching strategy.

Away from these military developments, the tightening of the French presidential election is contributing to the heightened anxiety. The latest polls show that when the margin of error is taken into account, any of the top four candidates could theoretically make it the second round. This led to a widening of the French premium over Germany.

The second driver was the comments by President Trump complaining about the dollar’s strength. Both the timing and substance of his remarks caught the market off-guard. According to various measures, the US dollar has declined through the first quarter. A few weeks ago, Treasury Secretary Mnuchin signed off on a G20 statement that reiterated the longstanding position the foreign exchange market should not be weaponized. That is to say that countries ought not to seek to boost competitiveness in the foreign exchange market, but that is precisely what Trump did. Despite the strength of US exports, Trump complained that the “strong dollar” was hampering the competitiveness of US firms.

The Dollar Index snapped a two-week advance and shed about 0.65% last week. Further losses seem likely in the coming days, as the technical condition deteriorated. Initial support is seen in the 99.80-100.00 area, and a break, which seems probable, given the position of the technical indicators, would target the 99.00 area, where the recent leg up began and housed the 200-day moving average. The five-day moving average is looks poised to fall back below the 20-day moving average next week. A move above the downtrend line connecting the January and March highs, and approached last week would lift the tone. It is found near 101.40 at the start of the new week, falling about two ticks a day.