INTERNATIONAL - The Dollar bounced back yesterday, snapping a three-week losing streak as investors consolidated positions before manufacturing data and minutes of a December US Federal Reserve meeting due later in the day.
But despite the dollar’s rebound, market strategists remain downbeat about the prospects of the greenback in the near term on concerns that future US rate hikes were broadly priced into the markets.
“From a DXY basis, there is very little going on for the dollar from current levels as we are seeing the continuation of very easy financial conditions with accompanying fiscal stimulus,” said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets referring to the dollar’s trade-weighted basket against its rivals by its popular acronym.
Evidence of easy financial conditions were evident with real interest rates in the US holding near their lowest in nearly five years, according to data.
The greenback gained 0.3percent on the day to reach 92.10points after falling 2.5percent over the last three weeks. On an annual basis, 2017 was the biggest annual drop for the greenback in 14 years.
Despite the biggest overhaul of the US tax code in 30 years passed by US policymakers in late-December, market analysts believe the worrying lack of inflation pressures would keep the dollar on the back foot in the coming months.
“The key question for markets is what is the game changer for the dollar in the short term and unless we see a significant pick-up in inflation, the dollar will remain on the back foot,” said Viraj Patel, an FX strategist at ING in London.
Seasonal forces were also at play such as a broad decline in dollar funding requirements over the thin-year period which typically acts as a support for the greenback.
BNP Paribas strategists said dollar funding pressures as noted by cross-currency basis swops peaked earlier than usual in December and has eased dramatically in recent days, eroding a key support.
Euro/dollar cross-currency basis swops for three-month maturities settled at its tightest levels in nearly three years at 22.5basis points, indicating that broad demand for dollars was muted.