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US dollar sell-off resumes overnight

The US dollar extended its losses for the week, the dollar index falling by 0.26% through support at 90.50. Assuming it navigates the FOMC without incident, the dollar index remains poised for further losses, with an initial target of 90.00. Having said that, the index has based at these levels numerous times in December, and if the Fed disappoints, a short squeeze could ensue.

Much of the dollar index weakness was led by sterling, although the other major currencies record consistent if modest gains versus the greenback. Sterling rose 1.0% to 1.3450 on Brexit trade negotiation hopes, something that financial markets refuse to put to bed. Despite the noise and the persistent bullishness, playing a 1.3200/1.3500 range still seems like the most sensible strategy until something concrete emerges from the talks.

Elsewhere, the Asian currency group remains subdued but is notable for its slow, yet remorseless, grind higher versus the greenback. USD/CNY has fallen to 5.5430 today, not far from the yuan’s recent highs around 6.5200. A weekly close below 6.5200 would signal another leg of yuan strength supported by an impressive yield advantage over the G-10 currencies.

The Australian and New Zealand dollars rose to near the top of their December ranges overnight. As proxies for the global recovery, both appear to be gathering strength for renewed rallies sooner rather than later. Any US dollar short-squeeze post the FOMC versus regional Asian or Australasian currencies is likely a dip-buying opportunity.

This evening’s heavy data calendar in the US could affect the US dollar, particularly Retail Sales for November and Markit Flash PMI’s for December. The highlight of the day is the FOMC policy meeting. I, and seemingly much of the market, expect the FOMC to shift their bond-buying emphasis to the longer end of the curve to cap recent rises in long-term rates. At a minimum, the markets will be hoping that even if the Federal Reserve does not choose that path tomorrow, they strongly signal their intention to do so in the New Year.