US dollar continues to erode losses

US dollar improves against majors

The US dollar correction continued overnight, with the greenback continuing to reduce some of its previous week’s losses. Yet again, most of the action was confined to the major currencies, where the US dollar sell-off was most prevalent. Asian currencies continue to edge lower, although bit the Thai baht and Malaysian ringgit are maintaining their recent gains.

The dollar index of major currencies spiked to 94.00 from its 93.46 open overnight, before giving up all of those gains to close at 93.51 after the release of the US ISM PMI. It has now traced out a double top at 94.00, which should provide significant resistance to further dollar gains.

Most of the dollar index spike higher was driven by sudden drops in the EUR/USD and GBP/USD, which traded as low as 1.1700 and 1.3000 on what looked like fast-money stop-loss price action. Both recovered to finish at 1.1765 and 1.3080, respectively. Further tests of the downside cannot be ruled out this week, with the US dollar correction higher looking like it still has more to go.

Traders should probably look to USD/JPY for clues in this respect. Having traced out a massive bullish USD/JPY outside reversal day on Friday, USD/JPY has consolidated its gains around the 106.00 area. USD/JPY has initial resistance around 106.70, with the potential to reach as far as 107.50 before the correction has run its course.

US Covid-19 new infections gave some cause for tentative cheer, with cases across the southern and western hotspots coming in at less than 50,000 for the second day running. Hopes rose that the US might avoid a deeper recession which was all financial markets needed to send equity markets higher, and for the US dollar to continue recovering some of its recent losses.

Overall, the US dollar continues to look like a buy, on dips scenario in the near-term. The price action in the bigger picture, though, looks like a bullish correction to a longer-term bear market. A tentative global recovery, combined with negative US real yields, multi-trillion-dollar deficits, bottomless free money from Federal Reserve, along with electoral uncertainty Covid-19 concerns, does not make a compelling case for dollar strength.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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