Home Markets Dollar index turns lower on profit taking

Dollar index turns lower on profit taking

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  • The dollar index has corrected 0.4% today on profit taking activities after printing a 2-month high on Friday
  • The greenback is likely to stay bid on persisting concerns over economic recovery
  • Sellers are now pushing the price action towards $93.90 which is likely to offer strong support

The U.S. dollar index (DXY) is trading around 0.4% lower today after it printed a 2-month high on Friday. Investors are most likely using this opportunity to book profits, while the greenback is likely to stay bid on persisting concerns over economic recovery ahead of a stream of economic data and political changes in the United States.

Fundamental analysis: Uncertainties keep supporting the dollar

A recovery in U.S. stocks on Friday has helped restrain the rise of the USD, however, indications of a slowdown in the incipient recovery from coronavirus and political issues have kept investors on guard.

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“Last week, widening credit spreads as seen in iTraxx Crossover and in European financials were seemingly a key driver for weakness in euro/dollar,” said Christin Tuxen, chief of research at Danske Bank.

“Indeed, rising global and notably European risk aversion continue to be clearly U.S. dollar positive, and notably investors entered this period of questioning the risk/reflation/recovery theme stretched on dollar shorts.”

The latest data from the U.S. Commodity Futures Trading Commission (CFTC) indicated that speculators held a net short position of $33.989 billion, above $31.524 billion from the week before and close to the highest mark in nearly 10 years.

On the other hand, data also pointed to large net long positions in the euro, marking a small rise last week to $27.922 billion.

“We think euro/dollar should find good long-term demand below the 1.1600 area, but really require some better news on the global recovery (effective lockdowns, vaccines, new stimulus) before the euro/dollar rally fully resumes,” ING analysts wrote in a note to clients.

Technical analysis: Dollar corrects

The dollar index has been trading lower at $94.15 after hitting a two-month peak of $94.74 last week, recording its biggest weekly surge since April. The greenback was quieter against Japanese yen, trading at $105.36.

DXY daily chart (TradingView)

The euro moved up to $1.1626 after slipping to $1.16125 on Friday, its two-month low. The British pound traded at $1.2797 GBP, higher than its 2-month low of $1.2676 on Wednesday. DXY is now heading towards $93.90, which is likely to offer strong support.

Summary

The USD traded near a two-month high versus a basket of currencies on Friday in the wake of a barrage of economic data and political developments in the U.S., as well as uncertainties regarding economic recovery from the pandemic. A correction is now taking place as sellers eye a pullback to $93.90.