LDN - Business

Dollar rebounds from two-year trough on Fed view

[August 20, 2020] By Julien Ponthus

LONDON (Reuters) - The dollar consolidated gains on Thursday after less dovish than expected minutes from last month's U.S. Federal Reserve policy meeting prompted bears to buy into the heavily shorted currency, fueling its biggest one-day surge in more than two months.

The dollar index, which tracks the greenback's value against a basket of currencies <=USD>, had climbed 1% above the two-year low at 92.12 hit on Tuesday and cemented gains at 93.01 in late morning London trading.

Dollar bears have reaped rich returns from shorting the greenback in recent weeks as the U.S. struggled to tame the coronavirus pandemic and the unprecedented policy stimulus unleashed by the Federal Reserve had darkened the outlook for the greenback.

But with short bets approaching historical extremes and a resurgence of COVID-19 cases in Europe, investors are turning less bearish on the greenback.

Deutsche Bank analysts said the recent rise of the euro against the dollar was probably running out of steam.

"With EURUSD having (nearly just) reached our 1.20 target earlier this week we now favour taking profit and see a more balanced outlook as we approach September", they told their clients.

In a similar move last week, HSBC foreign exchange strategists had also said they didn't believe the dollar's weakness would persist much further.

Speculation has been rife that the Fed will adopt an average inflation target, and seek to push inflation above 2% to make up for years it has run below, or look to cap government bond yields as part of a broader policy review.

But with the minutes vague on these matters, dollar bears took the signal that the dollar selling may be overdone for now and resumed selling the euro and the Aussie.

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Graphic: U.S. Dollar Index & CFTC speculative currency positions https://fingfx.thomsonreuters.com/
fx/mkt/nmovaqmqkva/
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EURO, NOKKIE

The euro - the biggest beneficiary of the dollar weakness - fell back below $1.19 and stood flat at $1.1836 <EUR=EBS>.

Short bets against the world's dominant reserve currency had risen to their largest since 2011 last week and long bets on the euro were at a record high. <0#NETUSDFX=>

In other currencies, the Norwegian crown briefly weakened against the dollar and the euro after the country's central bank said the currency is now stronger than it assumed in its June report. It held rates steady as widely expected.

Elsewhere, the U.S. Federal Reserve decided to cut the number of seven-day swap operations with major central banks to one tender per week from three beginning Sept. 1 as funding conditions have improved. Overnight borrowing costs have dropped below policy rates.

For Marshall Gittler, head of investment research at BDSwiss Group, the move isn't likely to have that much of an impact.

"I think it's more a demonstration of the policy's success than it is a reason for the dollar's move today", he said.

Graphic: World FX rates in 2020 https://graphics.reuters.com/GLOBAL-CURRENCIES-PERFORMANCE/
0100301V041/index.html

(Reporting by Julien Ponthus; Chart by Saqib Iqbal Ahmed; Editing by Alex Richardson and Bernadette Baum)

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