Dollar Selling Doesn’t Necessarily Require a Risk Appetite Drive
The US dollar fell against all of its most liquid counterparts this past week. In fact, the Dow Jones FXCM Dollar Index tumbled for 9 out of the 10 past trading days and subsequently closed out the trading week at its lowest level since November 14th. For all intents and purposes, the greenback has carved out a clear bear trend. However, determining what the drive behind this move is important to determining whether the selling pressure tapers off or intensifies over the coming week.
The most consistent pressure exerted on the benchmark currency so far this year has been the climb in underlying risk appetite trends. Using the S&P 500 to gauge sentiment, a near six-week advance has set the tone for positioning behind assets that are expected to offer a better return (versus the alternative of offering protection). That said, the entire drive has clearly lacked for participation (volume and momentum) while this past week was particularly strained with no progress made. This tells us the dollar’s slide can continue without active, market-wide reinvestment into risk. However, this divergence between price and fundamentals can’t last forever. And, a risk reversal is a very real possibility.
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