Investors Expect Another Wave of Dollar Weakness

The U.S. Dollar index (DXY) is losing 0.1% to 104.33 this week, while the EURUSD is declining by 0.1% to 1.08700. Major currencies are mixed, with commodity-driven currencies like the Australian, New Zealand, and Canadian Dollars weakening against the Greenback by 0.3-0.8% due to deteriorating commodity prices. The Euro and the British Pound are more stable relative to the Dollar, while the Yen is rising by 1.1%. Interestingly, investors are increasing demand for the Japanese currency without any support from the Bank of Japan. This may signal rising risks in the financial market.

Investors may be reacting to the pullbacks in the S&P 500 broad market index, potentially closing positions on American stocks and repaying their cheap borrowings in Japan. Alternatively, some investors might be anticipating possible monetary tightening by the Bank of Japan, with a meeting scheduled for July 31.

The second option deserves close attention. According to WisdomTree Bloomberg US Dollar Bullish Fund (USDU), large investors have made a big bet on the weakening of the Dollar by withdrawing $60.4 million from the Fund, marking the largest net outflow since late June 2023. At that time, the Dollar lost 3.4% against the Euro within a month. A similar situation occurred in mid-May 2023, when the Dollar initially rose by 1.0%, then lost almost 3.0% against the Euro.

If the situation repeats itself, August could be bad for the Dollar, and the EURUSD may resume climbing towards 1.10000-1.11000. However, first, the pair has to retest the 1.08000-1.08300 support. It appears unlikely that this support will break to the downside, so long trades for the EURUSD are likely to be considered at this level.

Good entry points could emerge next week if the Federal Reserve (Fed) signals possible interest rate cuts in September. An official approval of Kamala Harris as the Democratic nominee for President in August could increase the chances of a Democratic candidate entering the White House, potentially weakening the Dollar amid declining prospects for another Trumponomic cycle. This could be another opportunity for the bearish bets on the Dollar.