The American dollar seems to be treated by many as the currency of safe haven when turmoil or crisis occurs in the global economy. Then the American currency, as well as the Swiss franc or Japanese yen may strengthen.
This also happens during the crisis associated with the coronavirus epidemic that led to the freezing of the economy on all continents. It should also be remembered that in the world of finance the US dollar is the dominant currency. Main currency pairs are associated with it, futures are settled, ale commodities are quoted in dollars. It seems to be a currency necessary for all markets to function properly.
At the time of the first shockwave in the financial markets, the dollar was bought at almost every price, just to be able to settle all transactions. Its value climbed up until at one point the USD index contract exceeded 100 points. This, in turn, meant that USD would reach its highest level since the beginning of 2017.
At that time, the US Federal Reserve announced unlimited bond purchases, and the US government presented an aid package worth USD 2 trillion that we wrote about yesterday. This may mean that in this situation the dollar will be in abundance in the market and investors will no longer have to compete for it and buy at any price. Therefore, it is possible that with such a supply of the dollar on the market, its value could start to decline.
We are already observing a strong reversal on the dollar index, which is also evident in the EUR/USD exchange rate increase again. Looking at the COT report showing the positioning of institutional investors on futures contracts on the USD Index, we may see that with the increase in price, interest in long positions decreased. This may suggest that hardly anyone wants to buy USD so expensive, especially since the dollar may now be in abundance. As a result, it is possible that the US currency, like the US economy, may not have a bright future right now.
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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