A surge in bearish positioning on the dollar may be another indicator of an impending rebound. — Reuters
NEW YORK: Investors looking for short-term relief in the beleaguered US dollar may be encouraged by technical indicators and market positioning that suggest some overshooting of bearish bets.
The dollar fell to the lowest since December 2023 this week after President Donald Trump’s threat to fire Federal Reserve (Fed) chairman Jerome Powell along with the risk of a recession in the United States turbocharged the “sell America” trade.
“The dollar is poised for a rebound – short-lived or not,” said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank Ltd.
“Large bearish positions, technicals and real yield differentials suggest the greenback could bounce back” although its gain may be limited by dollar-negative headlines, he said.
The relative strength index (RSI) for the Bloomberg’s Dollar Spot Index has fallen to the lowest since 2020, suggesting that the currency’s nearly 10% drop from this year’s high in February may have been excessive.
The RSI’s drop to similar levels in July 2023 was followed by a rally of about 7% in the US dollar in the subsequent months.
A surge in bearish positioning on the dollar may be another indicator of an impending rebound.
Speculators’ net bearish positions on the greenback against 10 currencies and on the Dollar Index surged to US$40bil last week, the most since October.
This is based on data from the Commodity Futures Trading Commission aggregated by Bloomberg.
“The dollar sell-off may seem stretched for now,” said Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corp.
“Short dollar is also a big consensus trade, and that warrants some caution especially if there is any short covering.”
Data from the Federal Reserve showed an increase of more than US$10bil in marketable treasury securities held on behalf of overseas central banks, monetary authorities and international organisations in the two weeks ended April 16.
This showed that the rout in treasuries didn’t deter reserve managers from accumulating US government bonds, a move that’s supportive of the dollar.
The US dollar still holds a yield premium versus other major currencies on an inflation-adjusted basis, which could also provide an impetus for the greenback’s rebound.
The greenback struggled to hold gains yesterday, as it rose as much as 0.2% in early Asian trade before flipping to a loss.
It has only closed higher in three sessions so far this month. — Bloomberg
