The US dollar retreats

The US dollar short-squeeze appears to have run its course for now, as the greenback fell overnight after dovish Powell testimony alleviated taper-tantrum fears. The dollar index fell 0.15% overnight to 91.70 in a volatile session that saw it rise to 92.15 intra-day.

The major currencies clawed back some of the week’s losses, with EUR/USD rising to 1.1950, GBP/USD to 1.3950 and AUD/USD and NZD/USD to 0.7555 and 0.7020, respectively. Interestingly, USD/JPY continued to push higher, despite US weakness elsewhere and slightly lower long-dated US yields. USD/JPY rose 0.30% to 110.70, edging higher to 110.78 in Asia. The pair looks set to test resistance at 111.00, but unless US yields spike higher, I doubt that USD/JPY can sustain gains above that level for now.

In Asia, the US dollar has risen broadly, especially against the majors, which are all between 0.15% and 0.20% lower today. There is no apparent news driving the movements, and if anything, it suggests that currency markets have moved into a wait-and-see range-trading mode for the rest of the week. Only a Fed-speak or headline surprise is likely to shift momentum decisively one way or the other.

The US dollar continues to hold its gains versus Asian currencies, which have weakened again today after a neutral USD/CNY fix from the PBOC. It appears that most of the recent losses by the US dollar have flowed into DM currencies rather than EM. That suggests that some residual nerves remain out there amongst investors, concerned that more taper nerves could reappear.

The Bank of Thailand announces its latest policy decision today, and it will leave rates unchanged at a record low of 0.50%. With the country battling Covid-19 and the tourism sector in deep freeze, any change in stance from the BoT will not occur before 2022.

Overall, as previously stated this week, it is a day traders’ market. With a light data calendar for the remainder of the week, that is set to remain the status quo.