The US dollar has been on such a strong advance that some investors and journalists may suspect that there is a shortage of dollars.The Dollar Index rise has been relentless, appreciating in all but one week in each of the past three months. The US dollar is now higher on the year against most of the major currencies but the yen (3.0%), Norwegian krone (2.5%) and sterling (0.20%).
However, the dollar's advance continues to seem largely a function of short-covering rather than outright new longs. Although there may be more negative yielding bonds in Europe and Japan than at the end of last year, the foreign demand for US Treasuries does not appear especially robust. Domestic institutions continue to be the featured buyers. In the futures market, in the week ending May 8 which saw the euro drop two cents in the spot market, speculators added to their gross long futures position (5.6k contracts) bringing it to 226.6k contracts. Sterling was the victim of long liquidation. They cut the gross long sterling position by 22.4k contracts (to contracts 62.2 contracts).
We are not convinced the third large dollar rally since the end of Bretton Woods is over despite the 2017 losses. We think the main driver, the divergence of policy mixes, remains intact. Technically, the Dollar Index did hold the 61.8% retracement(~88.40) of the rally from the 2014 lows.The euro held a similar retracement and a monthly downtrend line from the 2008 record highs that converged near $1.26.
However, appreciating that the dollar's recovery has left technical indicators stretched, we have been anticipating the emergence of signs that a correction is at hand. The recent price action is generating those signals.In this phase, at least initially, we look for the Dollar Index to return to the 91.30-91.80 in the coming days.
The euro reached a low in the middle of last week near $1.1825. It is the lowest since the end of last year. However, the following day, perhaps encouraged by a slightly softer than expected US CPI report, the euro closed above the five-day moving average for the first time since April 17. The gains were not sufficient to avoid extending the losing streak the for a fourth consecutive week. The technical indicators have not turned, but they are poised to do so in the coming days. We suggest an initial target near the 200-day moving average, which is found near $1.2020 and the 38.2% retracement of the single currency's losses since the April 19 high.that is found near $1.2045.
