The value of the American currency on the world forex market is falling, looking at the broad measure of the USD index. Today, the index is in the area of 92 points, remaining close to levels that were last observed in May 2018. Last week, the dollar lost 1%.
In the dollar index, the euro has the greatest weight, and the EUR/USD exchange rate is thus in the area of 1.1900. Net long positions are growing on contracts for the euro. According to CFTC data, almost 15 thousand new positions appeared last week, and the total number of contracts increased to 211,752 – a record-breaking increase in the value of euro contracts against the US dollar. Such an attitude against the USD may cause August 2020 to be the worst August since 2015 and the fifth month of the dollar depreciation in a row. The last time the dollar had such a bad streak was in 2017.
It seems that after last week's change in the Fed's attitude to inflation, USD may come under even greater pressure in the future. U.S. interest rates may remain low for a long time despite the risk of rising inflation. As a result of these Fed measures, inflation expectations in the US have risen to 2.11%, which is the highest level since 2019. This may mean that negative real interest rates in the United States will be even higher, which in turn may reduce the attractiveness of US dollar assets.
In this way, the dollar may be sold out in the future, which the aforementioned investors seem to be already counting on euro contracts, opening positions at – in their opinion – the still relatively good exchange rate. The global economic recovery and very cheap dollar could still be a reason for benefits for currencies such as AUD, NZD, NOK, CAD, as these are the currencies from among commodities exporting countries.
Since last week the markets have been undergoing very significant changes, which should not be underestimated. The world's largest central bank has changed its mind about the most important measure, inflation, extending the period of ultra-low interest rates for years. This cannot be unnoticed by the financial markets in the long term.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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