USD Goes Down On Dovish Fed Remarks

The U.S. Dollar is traded almost neutral since the beginning of the week. The U.S. Dollar index loses marginal 0.1%. Most important is that the American currency begun weakening on Tuesday after surging on Monday on the breakout of Israeli-Palestinian conflict. 

First, Philip Jefferson, vice chair of the Federal Reserve (Fed) board said that he would “remain cognizant” of the higher bond rates and “keep that in mind as I assess the future path of policy.” Then Lorie Logan, president of the Federal Reserve Bank of Dallas indicated that higher long-term bond rates could help serve the central bank’s efforts to slow inflation to its 2% target. Bond yield immediately went down with 10-year Treasuries yields falling to 4.62% from 4.78%. The U.S. Dollar went moderately down erasing all geopolitical gains of the week. The American currency came under pressure after bets on possible interest rates hikes by the Fed decreased to 10.4% in November and 26.2% in December, according to FedWatch Tool. These developments may indicate a steady downside for the Greenback during the next two weeks.

This idea is confirmed by the strongest capital outflow since June from the ETF WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), designed to post gains when the U.S. Dollar appreciates. That time the Dollar lost around 2.5% to the Euro in a few weeks.

It is hard to suppose where the Dollar may go. Technical signals send it to 1.08 against the Euro, which is another 1.5-2.0% down. However, broader picture suggest that the U.S. Dollar rally may return at any moment as the sell-off in the stock market continues. The U.S. government shutdown is not resolved yes, as the temporary government funding will end on November 15. After House Speaker Kevin McCarthy ousting a compromise between Democrats and Republicans is seen very hard to reach. There is also a huge risk of oil prices rally if Iran would be involved in the new outbreak of the Middle-East conflict. If this will be the case debt yields will jumps sky high, and the Greenback may go to the parity with the Euro.

There are many reasons for the dollar to recover, and any of it may push the Dollar up after the correction. So, it would be wise to use the current weakness of the Greenback, especially if the inflation data this week will slow down. It is important to exercise caution, and to be prepared for another upside wave of the U.S. Dollar.