The US dollar’s modest recovery continues

The US dollar rose modestly overnight, with the dollar index regaining 91.00 and finishing 0.13% higher at 91.08. The index has now risen some 60 points from its 90.50 lows last week as US stimulus talks remain deadlocked, despite new inputs from the White House. If the talks remain deadlocked, the risk increases of a larger upward correction by the US dollar squeezing the large number of short dollar positions initiated over the past month. With the FOMC set to ease next week though, the US dollar remains a solid sell on any rally.

A US dollar short squeeze could see Asian currencies give back some of their gains, and some central banks such as South Korea’s and Bangkok’s may be happy to help that move along in forex markets. However, if China continues to hold monetary policy firm, and declines to intervene in markets to stem or slow the yuan’s appreciation in a significant way, Asian currencies remain a buy on dips into 2021. The US dollar is broadly lower versus Asian currencies this morning as the fall-out of New York’s equity sell-off has not spilt over into Asian markets to any degree.

The pro-cyclical Canadian, New Zealand and Australian dollars all remain near their recent highs and appear to be consolidating before further moves higher. All have shown resilience to US dollar strength seen elsewhere and will stay proxies to the vaccine-led recovery play for 2021. Dovish comments from the ECB meeting this afternoon could prompt some short-term euro weakness. EUR/USD is trading at 1.2090 today, and only a break of 1.2000 suggests a deeper correction. The single currency is likely to find plenty of buyers on any price falls, even if the ECB tries to talk it down.

The British pound will remain the primary source of G-10 currency volatility, as Brexit trade negotiations continue to make little progress ahead of Sunday’s deadline. Developments over the weekend, positive or negative, could make for some extensive ranges on Monday morning in the Pacific twilight zone. Until then, I expect GBP/USD to bounce around in a 1.3200/1.3500 range, and wise traders should probably wait for these levels patiently, and not get caught up in the noise in between.