Disappointing US economic data and high volatility in the German bunds kept the dollar under pressure. Over the past week the greenback fell against all the major currencies, save the New Zealand dollar (where interest rate cut expectations have built for as soon as next month). Most currencies from the emerging markets rose against the dollar, except for a handful of Latam currencies, including Argentina, Brazil, Colombia, and Peru.
While the dollar is still vulnerable to some additional near-term losses, we argue on both fundamental and technical grounds, it is premature to invest as if a new bear market for the dollar has begun.
The fundamental case for the dollar was based on divergence of monetary policy. This piece remains in place. As the Wall Street Journal survey found, an overwhelming a majority of economists (73%) expect the Fed to hike in September. Meanwhile, there is little doubt that the ECB and BOJ will be continuing to expand their balance sheets under versions of QE well past then.
From a technical perspective, the dollar’s losses in recent weeks must be seen in the context of the previous 11-month rally. The Dollar Index rallied 27.5% between May 2014 and March 2015. The pullback has been about 7.4%. It has not reached the minimum Fibonacci 38.2% retracement that is often looked for after a large move. That objective is found near 92.20 while the Dollar Index has only approached 93.00 thus far. The 92.00 area also corresponds to an objective of the possible double top carved out in March and April (neckline near 96.25). There is not compelling technical evidence suggesting that a low is at hand. Resistance is now seen near 94.00.
As we have often noted, the Dollar Index is not a true trade-weighted basket. Two of the top four US trading partners, (Mexico and China) are not included, and the basket is too heavily weighted to the euro and currencies that move within its orbit, like the Swiss franc and the Swedish krona. The euro itself has retraced more than 38.2% of its decline that began last year. That level is found near $1.1275. It should act as support now. The next retracement objective (50%) and resistance is seen in the $1.1500-30 area. The measuring objective of its potential double bottom is seen around $1.1600-50.
