The U.S. Dollar index (DXY) has declined by
0.35% to 104.27 this week, while the EURUSD has risen by 0.3% to 1.08870. This
weakness of the Greenback is unusual given the low trading activity during the
U.S. Memorial Day holiday on Monday. Typically, global trading activity remains
subdued and exchange rates mostly unchanged during U.S. holidays. However, the
Greenback continued to weaken on Tuesday morning, raising suspicions that
someone might be manipulating the market to knock out long position traders.
Despite this, the fund flows of the WisdomTree
Bloomberg US Dollar Bullish Fund (USDU) do not indicate a significant shift in
investor sentiment towards a weaker Dollar. The fund recorded its largest net
inflows since April 2022, with $73.1 million in early May, followed by net
inflows of $2.6 million without any outflows. This suggests that large
investors still believe in the potential for a stronger Dollar soon.
The Federal Open Market Committee (FOMC)
Minutes released last week support a stronger Dollar. The FOMC members
indicated their readiness to maintain high interest rates for an extended
period. If inflation remains stubborn in May and June, some members are
prepared to vote for another rate hike. This hawkish stance was reinforced by
recent U.S. business activity data, where Manufacturing PMI rose to 50.9 points
and Services PMI increased to 54.8 points, both surpassing consensus
expectations.
U.S. 10-year Treasury yields, which had fallen
to 4.31% on lower-than-expected inflation, have rebounded to 4.45-4.50%. Bets
on Fed interest rate cuts in September have decreased from 53.0% to 45.0%,
according to the CME FedWatch Tool. Investors are now focused on the upcoming
Q1 GDP data, expected to decrease to 1.3% from the initial estimate of 1.6%,
and the PCE index due on Friday, which is expected to remain mostly unchanged. This
could boost the Dollar by 0.7-1.0%.
Additionally, an interest rate cut by the
European Central Bank (ECB) that is expected next week could further support
the Dollar if the Fed maintains its hawkish stance.
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