The US Dollar Pushes Higher Again

Fundamental analysis of Forex market

US dollar gains on US yields, inflation fears

The dollar index pushed higher again overnight, rising 0.37% to 92.31. Rising US yields, structurally short positioning and a myopic fixation on growth-driven inflation continue to lift the greenback, notably versus G-7 and commodity currencies.

Nowhere is that more apparent then EUR/USD, where the single currency has fallen to a 4-month low at 1.1800. With the ECB expected to be dovish this week, in contrast to Federal Reserve Governors’ nonchalance, the downward pressure is expected to continue. EUR/USD will target 1.1600 over the coming week if it breaks materially through 1.1800.

GBP/USD is also testing the bottom of its multi-month rising wedge channel, today at 1.3830. Failure of channel support suggests further losses that could extend as far as 1.3400. Having paid all of daughter two’s UK university and apartment fees now, I feel the odds of this are rising.

The Australian and New Zealand dollars have both staged technical breakouts lower now, with multi-month support failing. AUD/USD is trading at 0.7660 today, with support at 0.7600 followed by 0.7400. NZD/USD is trading at 0.7130, just above support at 0.7100. Failure opens up further losses to 0.7000 and 0.6800. USD/CAD is testing its one-year falling resistance line at 1.2670 today and could rally to 1.2900 in the coming days.

In Asia, USD/CNY has moved higher to 6.5210, with the offshore USD/CNH rising to 6.5350. The next resistance level for USD/CNY is a multi-day top at 6.5550. The fall by the CNY overnight has pressured regional Asian currencies, which all retreated overnight in the face of US dollar strength. As I mentioned yesterday, Asian currencies face specific challenges in a rising yield environment due to their proliferation of dirty pegs to the dollar.

The Korean won, Singapore dollar and Philippines peso have all rallied today as equities staged a China-driven comeback. However, these moves look corrective and are unlikely to last. Notably, the ringgit, rupiah, and baht have all continued lower today, the former two despite higher oil prices. Regional Asian currencies will be acutely sensitive to the fallout from poor US bond auctions this week, should that occur.