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Dollar Recovery Over, but Fed Could Spark Second Wave of Strength

Fed rhetoric restrains dollar as traders eye inflation

By Administrator_India

Capital Sands

The dollar fell sharply against its rivals Monday as analysts declared the recovery in the greenback over, but stopped short of ruling out a “second wave” of strength on worries the Federal Reserve could raise rates sooner than expected.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.50% to 91.08.

“The short-term recovery of the dollar is over for now … [but] we cannot rule out the possibility of a ‘second wave’ of USD recovery,” Commerzbank said.

The bank suggested there was a risk the Federal Reserve could tighten monetary policy sooner-than-expected that would justify an “expensive” dollar. “The Fed could once again (as it did in 2015 to 2019) pursue a monetary policy in the medium term that is so qualitatively different from that of the ECB that an “expensive” dollar would be justified.

In the event of a second coming of dollar strength, the move will be short-lived as inflation is unlikely to trend materially above target and prompt aggressive Fed action. “The assumption of rapid Fed rate hikes is ultimately based on the assumption that U.S. inflation will not only pick up in the short term due to (partly Corona-related) special effects, but will sustainably firm up to levels above the Fed target. We do not share this view of the market,” Commerzbank added.

The dollar made a poor start to the week, compounding its losses from last week, following a slip in U.S. bond yields.

U.S. bond yields gave up some of their gains Monday, with the 10-year Treasury yields at 1.59%, down from 1.61% at the highs of the day.

Still, the latest positioning data showed bullish bets on the greenback hit their highest level for the year so far.

Net longs speculative bets on the dollar were at the highest level year-to-date, according to a CFTC positioning report for the week ended on April 13.

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