US dollar falls on euro strength

US dollar edges lower

Not much has changed in currency markets overnight, as US bond yields remained almost unchanged in the overnight session. The dollar index retreated by 0.30% to 92.62, led by EUR/USD strength. The index has interim support just below 99.55, and failure on a daily close basis will signal a further pullback to 92.00 initially. Strong US tech results could be the catalyst.

The euro outperformed overnight, EUR/USD rising 0.30% to 1.1805. It looks like impatient shorts, initiated after a dovish ECB last week, have thrown in the towel, and the resulting short-squeeze has lifted the single currency out of the danger zone for now—a range of 1.1750 to 1.1850 looks to be the story for the week. With Covid-19 cases falling rapidly in the United Kingdom, GBP/USD continues to trade constructively, rising 0.50% to 1.3825 overnight. Any dips to 1.3750 should find strong buyer interest now. Sterling looks set to retest 1.3900 this week as long as the Covid-19 situation maintains an appearance of being under control, allowing the UK to reopen smoothly.

USD/CNY remains stranded in a 6.4500 to 6.4900 range, with a daily close above or below those levels signalling its next directional move. The topside remains the weaker side, with authorities quietly drawing a line under further yuan appreciation some time ago.

Although the Australian and New Zealand dollars continued to trace higher overnight, a daily close above 0.7400 and 0.7000 respectively is required to signal an extension to the rally. Both remain highly correlated to the travails of regional Asia, with my fragile five of won, baht, rupee, ringgit and rupiah still at the mercies of the region’s Covid-19 delta-variant situation. They are also vulnerable to FOMC tapering nerves, keeping ASEAN currencies offered until the FOMC passes. However, all may gain some temporary respite after the China stock market meltdown as investors move capital out of China and redeploy to other parts of Asia.

Overall, the US dollar looks like it will track lower in the near term, but lingering fears of tapering statements from the FOMC will temper any selling pressure. If the FOMC passes without incident, the US dollar will come under pressure into the week’s end.

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