Markets Are Getting Ready for a Weaker Greenback

The U.S. Dollar is weakening since the beginning of the week. The U.S. Dollar index lost 0.5% to 104.7 points. This is a rather expected move ahead of the central bankers meetings this week. But the situation may change very rapidly.

The correction of the U.S. Dollar matured a few weeks ago, but the Greenback is struggling. Only three major currencies have demonstrated a significant upside correction against the Dollar. All of them also have a secret ingredient of the success. The Loonie was strongly supported by rising crude prices that added more than 10% since the beginning of September. Recovering China’s economy pushed the Aussie up, while the Yuan was support by China’s central bank.

Other currencies like the Euro, the Pound, the Yen and the Franc are underperforming. The Cable even lost 0.6% in the last ten days. The Euro lost 0.1% against the Dollar during the same period. It seems as if these currencies are waiting for a strong push to recover against the Greenback. And this week is perfect to generate this push as three major central banks will make their interest rates decisions. The Federal Reserve (Fed) will start first on Wednesday, followed by the Bank of England (BoE) on Thursday and Bank of Japan (BoE) on Friday. Investors would be very interested in Fed’s dot plot forecast, as they will be looking would there be another rate hike by the end of this year, and a rate forecast for 2024. The dot plot chart in June has suggested another 0.25% rate hike by the end of 2023 and a 1.00% drop in interest rates in 2024.

The meeting of BoE will be exiting too, as it may push the Cable on the recovery path, but it would hardly affect the rest of the currency market. The meeting of the BoJ could be identified as a “black box” amid controversial statement of its newly appointed Governor Kazuo Ueda. 

Investors positioning on the currency market confirm a possible correction of the U.S. Dollar. The ETF WisdomTree Bloomberg U.S. Dollar Bullish Fund reports a rapid decline of inflows. It could be a sign of an expected weakness of the Dollar.