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Dollar's Rally Linked to Positioning Adjustment.
The dollar is set for its best weekly performance in more than a year, with the dollar index - a broad measure of wider USD performance - is higher by 1.56% at 99.23.
We haven't seen an advance of this scale since November of 2024, and analysts say the move is a classic position adjustment in the wider FX market.
There are no credible fundamental drivers behind the movements; with the U.S. government in a semi-shutdown, there's no official data for traders to dig their claws into.
According to currency analysts at MUFG Bank, most of the action in recent sessions has come from investors reducing their short dollar bets, rather than from any new fundamental story.
In other words, traders who had been positioned for a weaker dollar are now unwinding those trades, giving the greenback an artificial lift as positions are closed out.
"Price action in FX markets yesterday certainly looked indicative of a further adjustment in positioning with short positioning lightened further. The FX market is where we saw bigger moves relative to other markets," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG in London.
- The dollar index - a broad measure of wider USD performance - is higher by 1.56% at 99.23
- The dollar is 1.2% up against the pound this week, with GBP/USD falling to 1.3308. This is in keeping with our forecast for GBP/USD made ten days ago.
- The dollar is up 1.33% against the euro this week, with EUR/USD falling to 1.1584
Halpenny notes that leveraged and non-commercial players - hedge funds and speculative accounts - had built up heavy short positions in recent months, betting that softer U.S. data and rate cuts would weigh on the currency.
But with no major surprises emerging from U.S. markets and Treasury yields moving only 1-2 basis points higher, momentum has taken over.
"The reversal in the dollar at the start of 4Q is forcing investors to reverse short positions," says Kenneth Broux, FX strategist at Société Générale.
That lack of news has allowed the dollar’s rebound to feed on itself: once short covering starts, it triggers more of the same, reinforcing the rise.
At the same time it's also worth pointing out that ex-USD, there is a lot going on, and for some key currencies, the news is clearly not great:
The JPY is the big faller of this week as new Prime Minister Sanae Takaichi is elected. She is a devout follower of the Abenomics faith: i.e. get the central bank to keep interest rates low and then buy up all the government debt you can issue. This kills expectations for further rate hikes and flattens the yen. As USD/JPY rises, all the other USD- crosses rise too.
The EUR rally has meanwhile hit the buffers on the reality that France's domestic political setup is an intractable mess. Sure, the government can muddle on, but in the big picture, it becomes more likely the ECB will have to step in to support French government bonds at some point.
This will effectively mean the ECB rescues a fiscally irresponsible country, and the rest of the Eurozone will ask why they have to behave and France gets away with whatever it likes. This isn't good for Eurozone fiscal integration and points to the perennial weaknesses of the bloc.
Also, Germany's economic data has really disappointed of late, indicating another poor quarter is underway.
The GBP is facing significant fiscal challenges too. Unlike France, the UK does not live in a big monetary union underpinned by Germany and where the ECB is poised to lend assistance.
The bond market will come knocking on Number 11's door before it does at the Bercy building in Paris. With Labour unwilling to cut spending, higher taxes are coming. Businesses are starting to struggle under the weight of the tax increases implemented this year, and anxiety is growing ahead of another big-tax budget in November.
So, with some big currencies under pressure, the USD has little choice but to rise.