The Greenback Is Scaling Back to Hit Hard

The U.S. Dollar is scaling back since the beginning of the week. The U.S. Dollar index (DXY) is losing 0.5%. The losses were even bigger when the index dropped by 0.9% at some moment on Monday. The correction of the Greenback happened amid U.S. money market stabilization, where sales-off finally slowed down.

The U.S. 10-year Treasuries yields dropped to 4.81% from the 5.02% on Monday. This had an immediate effect on the stock market, where the S&P 500 broad market index added 0.2% despite intraday losses of 0.7% at some moments. Some optimism in the stock market lower the demand for the Greenback. This correction of the American currency could be associated with statements of two major sharks of Wall Street, Bill Ackman from Pershing Square and Bill Gross, a co-founder of fixed-income investing giant Pacific Investment Management Co. Both believe that investors may increasingly buy bonds as a safe haven because of growing geopolitical risks and nearing recession. “There is too much risk in the world to remain short bonds at current long-term rates,” Ackman said in a post on X, formerly known as Twitter, on Monday. “We covered our bond short.” This is a bold statement from the very serious person. Would it be enough alone to reverse the debt market?

There are more serious reasons for the U.S. debt market to reverse. Bank of Japan conducted an unscheduled bond-buying operations to slow down a raise in government bonds yields. Japan's central bank offered to buy 300 billion yen ($2.00 billion) in bonds with maturities of five to 10 years and 100 billion yen worth with maturities of 10-25 years starting October 25. The yield went down immediately early Tuesday. The U.S. debt yields had to follow.

Brent crude prices dropped by 2.5% to $90 per barrel on Monday. This drop could be attributed to the delay of the military ground operation in Gaza strip by Israel. It could be also related to a possible decline in demand for oil due to a slowdown of global economy. Anyway, lower oil prices are slowing down inflation, while lower inflation provides less reasons for the Federal Reserve (Fed) to raise its interest rates. These additional reasons may prove that Ackman may be wrong on a short distance. 

If the Israeli-Hamas conflict would expand into Israeli-Arab regional war, which is quite possible amid the launch of Israel’s ground operation in Gaza strip, then interest rates and oil prices would rally sky high. This will be a time for a Dollar to reclaim its new highs close to the parity with the Euro. 

The EURUSD may rise to the resistance at 1.07200-1.07400 this week, which is another 0.8% drop for the Dollar. It the correction would be extended the euro may rise to 1.08000-1.09000 by the mid-November. 

Many scenarios are on the table now. The meeting of the European Central Bank (ECB) and PCE index data this week could have a strong effect on the exchange rates. The fed meeting next week will be of particular interest in this regard, as it may give a green light to major changes in the currency market. Meanwhile, a slow correction for the Dollar would be continued.

Large investors are raising demand for the Greenback The latest data of capital flows into WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) ETF indicates that inflows are rapidly increasing. This may serve as another indication of a strengthening Dollar soon.