The dollar fell on Monday as a growing consensus that the greenback’s rally has run out of steam coincided with a renewed focus on the structural deficits of the US.
The dollar has made strong gains in recent months, surging from $1.345 against the euro in March to a high of $1.188 in early July as investors chased yield.
However the dollar’s repeated failure to sustain a bridgehead beyond $1.20, despite a welter of positive economic data, has led many to conclude that the move is now over, for the time being at least.
Indeed Monday’s fall came despite the strongest manufacturing report this year from the Institute for Supply Management, which sent the yield on 10-year Treasuries to a three-month high of 4.34 per cent.
“The dollar’s failure to gain last week on strong US data and rising US yields is feeding concerns that significant good news on the cyclical front is now reflected in current exchange rates, leaving the US currency once again vulnerable to structural infirmities,” said Mansoor Mohi-uddin, chief forex strategist at UBS.
These structural infirmities were highlighted by an International Monetary Fund report, which said the level of the dollar was still above that necessary to avoid a further widening of the US external deficit.
“The dollar is becoming increasingly immune to heightened expectations that the Federal Reserve will push the funds rate above 4 per cent as the IMF redirects investors’ attention onto the US current account deficit,” said Monica Fan, global head of forex strategy at RBC Capital Markets.
Short-term traders already appear to be taking profits on the dollar. Data from the US Commodity Futures Trading Commission showed that in the week to July 26, net long-dollar speculative positions fell by $2.5bn to $9.5bn, the smallest net-long since May.
Some saw geopolitical concerns further undermining the dollar. The death of Saudi Arabia’s King Fahd was not seen as overly worrying, with Crown Prince Abdullah having been de facto ruler for a decade.
However Hans Redeker, head of currency strategy at BNP Paribas, said Iran’s decision to re-start its uranium programme added to the dollar’s risk premium.
Tony Norfield, global head of forex strategy at ABN Amro, saw further dollar-bearish news in Russia’s decision to measure the rouble’s volatility against a basket of 0.35 euro and 0.65 dollar, rather than 0.3 and 0.7.
Although the move does not necessarily involve the re-balancing of Russia’s forex reserves, it does “chip away at the dollar’s hegemony,” Mr Norfield argued.
As a result the dollar fell 0.6 per cent to $1.2192 against the euro, 0.4 per cent to Y112.14 against the yen and 0.8 per cent to $ 1.7694 against sterling.
Elsewhere the yen was soft, slipping 0.3 per cent to Y198.35 against sterling and 0.2 per cent to Y136.73 against the euro as oil prices resumed their upward trend.
The Chinese renminbi rose to a post-revaluation high for a third straight session, firming to Rmb8.1046 against the dollar from Rmb8.1056 on Friday.
However Mr Norfield argued that this was less a sign that the People’s Bank of China is happy to see a gradual strengthening of its currency, and more a sign that the PBoC is holding the renminbi flat against its unspecified currency basket, which thus involves a degree of strengthening against the softening greenback.
Based on this premise and recent daily moves, Mr Norfield’s estimates that Beijing’s basket is 60 per cent US dollar (encompassing the pegged Kong Kong dollar), 20 per cent euro and 20 per cent yen.
With Beijing under political pressure to let the renminbi weaken against the US dollar, this suggests that China’s revaluation may have been timed for a period when the PBoC believed the dollar was set to weaken against the yen and euro.
