The dollar index versus a basket of six major currencies crept up 0.1 percent to 94.882. The index was in reach of 95.131, a seven-month peak scaled on Friday when it soared more than 1 percent last week after the U.S. Federal Reserve gave a hawkish signal on interest rates while the European Central Bank struck a dovish tone.
KUALA LUMPUR: The US dollar is more likely to continue its rally at least in the near-term with the US bond yields still moving higher and providing support for a stronger dollar, says AmBank Research.
It said on Tuesday the dollar first picked up steam as the 10-year Treasury yield edged towards the psychological level of 3% which it eventually breached.
Helped by a lift in short and long-dated US bond yields to fresh multi-year highs while the geopolitical risk perceptions have tentatively waned, the greenback rallied close to 3% since late March.
With the bond yields on the rising trend, it has lent support to the dollar, the research house said.
“Although the dollar does not always correlate highly with the US yields, still correlation between them tends to be high when both are rising. The relationship does last for close to about three months.
“On that note, there are possibilities for this positive dollar trend to continue in 2Q of 2018,” it said in its forex outlook.
AmBank Research however noted that in the process the greenback is poised to experience some pull back from its upward trend.
It cites that the link between currencies and interest rate divergences reignited when the European Central Bank acknowledged the weaker economic data unveiled of late.
But this could easily swing the other way, as expectations are for the euro zone data to improve in the near-term. Besides, it would take just a few words from the US Federal Reserve to reverse this strong dollar trend.
To recap, AmBank Research said the dollar is in rally mode. It pointed out that during the late 2017, the currency saw a decent correction between October and December when the hope for the tax plan drove it higher.
However, the greenback rally faded out in the beginning of the year. Issues like the high debt burden and current account position caused discomfort and resulted to a weaker US dollar at the beginning of the year.
More recently, the dollar bulls focused on the interest rate differentials theme. They comfortably forgot the greenback’s own issues which are high debt burden and current account position that weakened the currency at the beginning of the year.
AmBank Research said with these problems still there it will be tough for one to ignore it. It means the possibilities for these issues to emerge and weigh on the greenback again in the future is on the cards.
“So, it appears that the behaviour of the US dollar for now may not be fully supported by the fundamental stories. It could also be supported by ‘short covering’,” it said.
The term “short covering” is buying back borrowed securities in order to close an open short position. It refers to the purchase of the exact same security that was initially sold short, since the short-sale process involved borrowing the security and selling it in the market.
“Hence, the current greenback movement may not be fully supported by fundamentals. It will raise eyebrows on whether the greenback will also fade out when we get exhausted with the same old stories that offers limited support for the dollar.
“On that note, until the potential incoming data from the major economies starts to unveil more exciting and convincing numbers, the trail of minimum resistance will remain for the market to continue to chase carry and cover dollar short remains.
“The moment potential macro incoming data sheds positive light again, the story of weaker dollar will creep again,” said AmBank Research.
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