Will the dollar lose ground?

The US currency has appreciated systematically since May 2021. Reflecting the strength of the dollar USDX index then he started climbing from the level of almost 89 points, to exceed 94 points last week. However, the 5% appreciation is coming to an end. What could be the reasons for this?

It appears that the anticipation for action was the main driver of the strong appreciation of the US dollar Federal Reserve. It was about limiting the crisis (introduced in response to the outbreak of the pandemic) financial policy already in November this year. and interest rate increases in the second half of 2022.

Elsewhere in the world, the market, as a rule, had not yet evaluated growth opportunities at the time interest ratesor, in any case, it was not common in the most advanced economies. The Fed was therefore to be one of the first major central banks to make such a decision.

However, the situation seems to be changing. There are clear signs of weakness in the US currency and the days gone by are one of the biggest sell-offs. The exchange rate of the main currency pair in the world EUR / USD it returned relatively quickly from around 1,1520 to 1,1650.

The strong increase in expectations for interest rate hikes is launching the forex market

Due to the rise in inflation, expectations of interest rate hikes in many countries have increased. In New Zealand, growth is expected to reach 50 basis points. President Bank of England Andrew Bailey also signaled the possibility of an earlier interest rate hike, saying on Sunday that the central bank must act to contain rising inflationary risks.

Według JP Morgan The Bank of England may raise the main interest rate by 15 basis points as early as November this year. On the other hand, the money market is pricing in the possibility of an increase by 50 basis points in December. The next BoE meeting is scheduled for November 4, and the main interest rate there is currently 0,1 percent.

The New Zealand dollar and the British pound seem to be among the top currencies appreciating against the USD. In the last quarter, NZD gained nearly 2,9% versus USD and GBP appreciated by almost 0,8%. The UK and New Zealand 10-year bond yields have also risen faster than the US 10-year bond yields recently.

Investors are heavily involved in dollar futures

An important risk factor for the USD may also be how investors position themselves on the US currency futures market. According to the data CFTCIn the week ended October 12, the advantage of long positions (calculated on the appreciation of USD) over short positions among speculators was the highest in two years. If the dollar does not significantly appreciate, investors may feel disappointed with the decisions they have made, which may eventually lead to the closing of long positions, and this may lead to a decline in the value of contracts and the USD itself.