Dollar in Longest Run of Gains Since March Before Dudley, PPI

  • Euro risk reversals extend drop on increased downside risks
  • Sterling, Scandinavian currencies find support from data

Dryden, Rahbari on Outlook for the U.S. Dollar

The Bloomberg Dollar Spot Index rose for the fifth day as North Korea tensions eased slightly ahead of a report on U.S. producer prices and a speech by New York Federal Reserve President William Dudley.

The gauge was on track for its longest winning streak since March as investors further trimmed their short exposure amid the latest bout of risk aversion and increased odds of an extended dollar rebound. The greenback was stronger against most Group-of-10 peers, with leveraged accounts driving the moves amid relatively low interest from interbank and macro accounts, according to a Europe-based trader.

Dollar positioning remains short, with leveraged funds being the most bearish on the U.S. currency since early 2013. Dudley’s speech may lean on the hawkish side as last week’s strong jobs report provides leeway for him to point once more toward upside risks in inflation. Jobless claims and producer prices are also due Thursday and strong prints may further boost the greenback’s allure.

Should Dudley fail to provide comfort to dollar bulls or producer price data show little response to the U.S. currency’s weakness, the Bloomberg Dollar Spot Index may reverse gains and await Friday’s inflation data to determine if a fresh year-to-date low is on the cards.

  • BBDXY was 0.1% stronger as of 10:48 a.m. London; while tension surrounding the Korean peninsula hasn’t faded altogether, implied volatilities in the front-end suggest concerns are slowly easing even as stocks and treasury yields dive into red
    • The yen was higher versus most currencies in a basket of 17 major pairs, while the Swiss franc was lower against most peers
  • The euro was sold off at any attempt to rally and was down by as much as 0.4% to 1.1709 low; positioning is lighter after Wednesday’s washout below 1.1700 while order books are now more balanced with strong support seen at 1.1650-80 and offers accumulating above 1.1770, said the trader, who asked not to be identified as he wasn’t authorized to speak publicly
    • One-week risk reversals in EUR/USD look set to hit a three-month low while vol skew reveals how ECB September meeting remains the key point for euro bulls
  • The sterling was consistently defensive since London open on fast-money selling as it dropped to the day’s low of 1.2952; the pound managed to recover and trim a good part of the losses as it rose to 1.2989, still 0.1% lower on the day, as industrial production beat forecasts to rise 0.5% in June
    • Given manufacturing stagnated and the trade deficit unexpectedly widened, rallies above 1.3000 may meet renewed selling interest
  • The Norwegian krone rallied on the back of higher inflation while the Swedish krone drew support from stronger industrial production; NOK/SEK is 0.3% lower at 1.0249, flirts with a close below 21-DMA, currently at 1.0254, for the first time since July 17
  • The New Zealand dollar led losses in G-10 land on RBNZ language shift as lower dollar is now ‘needed’ instead of ‘would be helpful’
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