The Dollar is Trying to Recover

The U.S. Dollar index (DXY) is declining by 0.5% since the beginning of the week. Asian currencies are the most contributing to a weakening of the Dollar. The Japanese Yen strengthened by 1.5% against the Dollar since the beginning of the week, the Aussie and Kiwi are adding 1.0% and 1.4% respectively.

European currencies are doing worse with the British Pound up by 0.5% to 1.25300 and the EURUSD up by 0.4% to 1.09600. Chinese Yuan is in the epicenter of the strengthening against the Dollar. As it added 1.2% to 7.13 since this week. It is the highest level since July 27. There are no macroeconomic reasons for such strengthening. China’s central bank has left its interest rates unchanged at its last meeting on Monday. It also raised its onshore Yuan exchange rate several times this week. However, China’s central bankers have acted much more aggressively before to support the Yuan without any strong reaction by the national currency.

This may point to geopolitical factors of the strengthening after U.S. President Joe Biden and Chinese leader Xi Jinping met in San Francisco. This meeting is considered as a positive sign for easing of geopolitical and economic tensions between two world’s major powers. A possible swift truce in Gaza that was highlighted by Biden and Hamas leaders could speak in favour of such positive developments. The truth is that investors believe in such positive developments, which is affecting prices in a positive manner.

Technically, further weakening of the Greenback could be also justified. The EURUSD has surpassed a possible reversal period and may go up by 2.5-3.0% to 1.12000-1.13000 by the end of December. This upside could be inhibited by both strong rise of the U.S. stock market and rapid Dollar decline. Large investors also bet on a stronger Dollar. Capital inflows into WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) resumed last week after a short break.

The EURUSD should scale back to 1.08000-1.08200 to remove the oversold tension. It would be logical to expect a scale back of the EURUSD in the next couple of weeks before it could go up again. There is no guarantee that the Dollar continues to retreat afterwards. It will largely depend on investors’ sentiment whether the Greenback will continue down or a force majeure strengthening will become a priority.