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Dollar’s ascent pauses before Fed outcome; Aussie struggles

The U.S. dollar’s march towards a 3-1/2 month high paused on Tuesday as a Fed policy meeting got underway with risk appetite broadly subdued, leaving the Australian dollar struggling due to a widening regulatory crackdown in China.

Against a basket of its rivals =USD, the greenback was trading at 92.73, not far from an early April high of 93.19 hit on July 21. The dollar has rallied more than 4% from 2021 lows of below 90 hit in late May as a decline in U.S. Treasury yields forced investors to cut their short dollar bets.

Net long dollar positions flipped to their highest levels in more than 14 months last week, according to latest CFTC data. This marks a significant turnaround from the first quarter of 2021 when hedge funds had ramped up their bearish bets on expectations that record low U.S. interest rates would hobble the greenback.

Stephen Jen who runs hedge fund Eurizon SLJ Capital notes the real money community is “still significantly short the dollar, even thought the leveraged community has by and large flattened their dollar positions.”

“Thus, if euro/dollar breaks below 1.17, there could be large capitulation trades sending the cross to the 1.11-1.13 zone later this year,” he wrote in a note to clients.

In early London trading on Tuesday, the euro EUR=EBS was changing hands at $1.1780, not far from an early April low of $1.1752 hit last week.

More gains for the dollar are in store if the Fed strikes a hawkish note at the outcome of a two-day policy meeting on Wednesday although market consensus believes unlikely.

The Fed’s meeting comes after a study released last week by the National Bureau of Economic Research showed the coronavirus-induced U.S. recession lasted only two months.

MUFG strategists said the shortness of the recession could lead the Fed to reverse its policy stance more quickly but that this seems unlikely as the new monetary policy strategy framework allows for a less aggressive response.

Elsewhere, concern at the spread of the Delta coronavirus variant and jitters in China’s stock market kept trade cautious during Asia hours. The risk-sensitive Australian dollar AUD=D3 was steady at $0.7382 and the kiwi NZD=D3 held around $0.7000.

Sterling was above its 20-day moving average and near a one-week high at $1.3827 as early data seemed to show an ebb in surging COVID-19 cases in Britain in spite of the removal of many social curbs last week.

The Chinese yuan CNY=CFXS has held up despite turmoil in equities and was steady at 6.4760.
Source: Reuters (Reporting by Saikat Chatterjee; Editing by)

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